As ASEAN starts its economic integration in 2015, there have been certain important developments in the legal and regulatory framework of the Philippines. As elucidated below, the changes of recent years have significant implications in the area of banking and finance, mergers and acquisitions, and data privacy.
LIBERALISED ENTRY OF FOREIGN BANKS: Perhaps the most significant legal development in the banking sector is the passage of Republic Act No. 10641, which allows full entry of qualified foreign banks into the Philippines. Prior to this law, a foreign bank could enter the Philippine banking system by (1) acquiring up to 60% of the voting stock of an existing domestic bank, (2) forming a new banking subsidiary whose voting stock was to be owned up to 60% by the foreign bank, or (3) establishing a Philippine branch with full banking authority. Eventually, these last two modes of entry were closed. Under the new statute, all three modes have been made available anew, with modifications. Presently, a foreign bank can be authorised by the central bank, Bangko Sentral ng Pilipinas (BSP), to (i) acquire up to 100% of the voting stock of an existing bank, (ii) form a 100%-owned banking subsidiary, or (iii) establish a Philippine branch with full banking authority. Before, to be considered by the BSP, a foreign bank had to be among the top 150 foreign banks in the world or among the top five banks in its country of origin. Now, it is sufficient that the foreign bank be widely owned or publicly listed, if not owned or controlled by the government of its country of origin.
Prior to the passage of the new law, a domestic bank whose capital stock was owned more than 40% by a foreign bank, as well as a local branch of a foreign bank, could not bid at the foreclosure sale of land mortgaged to it, and was merely entitled to receive the net proceeds from such sale. This was in view of the provision in the constitution of the Philippines restricting the ownership of land to Philippine nationals, such as through a company at least 60% owned by Philippine citizens. At present, a foreign bank, acting through its local subsidiary or branch, can bid and purchase the mortgaged land at foreclosure (without the title thereto being transferred to it), but with an obligation to transfer its rights to a qualified Philippine national within five years from the land purchase. During this five-year period, the foreign bank’s subsidiary or branch will have actual possession of the purchased land.
To enhance the competitiveness of the local banking system, the BSP has raised the minimum capitalisation of banks. For instance, a universal bank with more than 100 branches is now required to have a threshold capital of P20bn ($450m), up from P4.95bn ($111.4m), while a commercial bank with the same number of branches must be initially capitalised at P15bn ($337.5m), compared to P2.4bn ($54m) before.
The BSP is also reinforcing prudential measures to minimise systemic risk, as exemplified by its adoption of a stress test for the real estate exposures of local banks. With growing international reserves, the BSP is confident of the bright prospects of the country’s banking system in the years to come.
ISLAMIC BANKING & FINANCE: One can also observe positive developments in Islamic banking and finance. The Philippines was one of the earliest countries in the region to recognise Islamic finance. More than 40 years ago, a legislative franchise was granted to Al Amanah Bank, the country’s first bank formed to cater to the banking requirements of the Muslim population in the southern Philippines. The said bank was eventually reorganised in 1990 as the Al-Amanah Islamic Investment Bank of the Philippines. Since that time, however, the government has taken no significant steps to encourage Islamic banking and finance in the country. With the signing by the government of a framework agreement on the Bangsamoro in order to end the armed conflict in southern Philippines, and with the expected passage of the enabling law to implement that agreement, a new impetus for the promotion of Islamic banking and finance in the country has arisen. It is anticipated that the BSP will authorise the establishment of Islamic banks in the country, or at least allow conventional banks to open Islamic windows.
Ideally, the Congress of the Philippines ought to enact a specific legal framework for Islamic banking and finance. Even without such a framework, however, the BSP can, at this stage, already allow local banks to open Islamic windows, based on the BSP’s mandate in the General Banking Law to classify and license “Islamic banks as defined in Republic Act No. 6848, otherwise known as the Charter of Al-Amanah Islamic Investment Bank of the Philippines”. Here, one will note the reference to Islamic banks in the plural and not singular, with the existing Al-Amanah Islamic Investment Bank mentioned only as a model entity. Based on this deliberate language, there is a mandate for the BSP to allow more than one Islamic bank in the country. At this juncture, the BSP can initially authorise conventional banks to open Islamic windows. Eventually, the BSP can push the frontier further, by licensing stand-alone Islamic banks (now merely Islamic windows), based on its aforesaid mandate, coupled with its authority under the same General Banking Law to make “other classifications of banks” as it may deem appropriate.
In fact, existing laws applicable to conventional banking and finance are not a hindrance to Islamic banking and finance. Article 1306 of the Civil Code of the Philippines allows contracting parties to “establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy”. This freedom in contract-making would certainly allow the adoption of terms and conditions suitable to Islamic banking and finance, with the approval of the BSP and other pertinent regulators.
In this area, the private sector is leading the way to spur Islamic investments in the country. The Philippine Stock Exchange (PSE) came up with a list of companies that pass the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions. The PSE seeks to diversify its investor base by launching this sub-index of sharia-compliant stocks.
MERGER CONTROL: Pending the enactment of an anti-trust or anti-monopoly law by Congress, the Department of Justice – acting through its Office for Competition (OFC) – entered an agreement with the Securities and Exchange Commission (SEC) for monitoring “mergers of corporations, acquisitions, consolidations, and other anti-competitive conduct in the market or concerned industries”. Under the agreement, the SEC will provide the OFC with copies of all documents relating to proposed mergers or consolidations. The OFC will assess whether the resulting amalgamation will create a monopoly or be in restraint of trade. The SEC will consider this assessment in its decision to approve or disapprove the proposed transaction.
Apart from this, the insurance commissioner can disapprove the acquisition of control of a local insurer if “the effect of the acquisition may be substantially to lessen competition in any line of commerce in insurance or to tend to create a monopoly therein”. Control is presumed if an acquirer will directly own or hold at least 40% of a local insurer’s voting stock. In the banking sector, the BSP’s approval is required for acquisition of more than 20% of a local bank’s voting stock.
With the initial implementation in 2015 of ASEAN economic integration and the eventual launching of qualified ASEAN banks, the BSP will continue to encourage mergers and consolidations between and among local banks to make them more competitive with their much bigger counterparts in the region.
DATA PRIVACY: The Data Privacy Act was passed “to protect the fundamental human right of privacy of communication while ensuring free flow of information to promote innovation and growth”. Protected here is “personal information”, defined as “any information recorded in material form or not, from which the identity of an individual is apparent or can be reasonably and directly ascertained by the entity holding the information, or when put together with other information would directly and certainly identify an individual”. However, this act does not interdict the reporting of information by local banks and other financial institutions to the BSP under the Credit Information System Act and the Anti-Money Laundering Act of 2001.
The Data Privacy Act does not amend the various bank secrecy laws. However, the Anti-Money Laundering Act of 2001 empowers the Anti-Money Laundering Council to examine deposits or investments with banks and other financial institutions, when there is a probable cause that these deposits or investments are involved in money laundering. Here, the said council is generally required to obtain a court order for that purpose. In contrast, under the Terrorism Financing Prevention Act of 2012, the said council, either upon its own initiative or at the request of the Anti-Terrorism Council, can inquire into or examine deposits or investments with banks and financial institutions, without a court order.
OBG would like to thank SyCip Salazar Hernandez & THE REPORT The Philippines 2015
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