BSP orders banks to tighten compliance

Banks in the country are now required to establish compliance departments that will help ensure they observe all regulations against various business risks that may erode their financial performance and their ability to properly service the public.

Circular 747—which the Bangko Sentral ng Pilipinas has issued in its bid to align domestic bank regulations with those pushed and observed internationally—requires a bank to come up with a charter, which must be approved by its board, that creates a compliance department and enumerates its functions and responsibilities.

The establishment of a compliance department necessitates the appointment of a chief compliance officer (CCO), who shall be responsible for overseeing a bank’s observance of BSP-issued regulations and other practices that are deemed prudent for making the bank maintain healthy operations.

“A robust, dynamically responsive, and distinctly appropriate compliance system shall be put in place as in integral component of an institution’s internal controls,” the BSP said in the circular.

In the circular, the BSP also defined the business risks that a bank’s compliance department must closely monitor and work against.

These risks include decisions and actions that may erode the trust and confidence of the public, or those that may hurt the bank’s market standing. These risks may also include misinterpretation of bank regulations that may have adverse consequences on a bank’s performance.

Regulators said the crucial role of a banking system in ensuring proper functioning of an economy is the reason regulations are constantly enhanced. The latest financial and economic crises suffered by the United States, which eventually led to a global recession in 2009, were a proof of the enormous consequences of poor banking practices, they said.

However, the continued enhancement of bank regulations requires more effort on the part of the banks to update themselves as far as compliance is concerned.

The establishment of a compliance department will help ensure that banks, which tend to focus on profitability amid rising competition, are able to keep pace with changing regulations.

Last month the BSP announced that Basel 3—a set of enhanced banks regulations focusing on capitalization rules—will be fully implemented in the Philippines by 2014.

The BSP said that banks are expected to prepare for the implementation of tighter capitalization requirements over the next two years.