Statement from the Private Sector Members of the Capital Market Development Council on recent failures of financial institutions

We, the private sector members of the Capital Market Development Council (CMDC), wish to express our grave concern over the circumstances surrounding the recent failure of a syndicated group of small banks that engaged in Ponzi or pyramiding-like schemes. It is extremely alarming that vital regulatory actions of the Bangko Sentral ng Pilipinas over banks have been impeded by Court issuance of temporary restraining order (TRO).

While our economy may have been spared the direct hit of giant financial institution failures in the US, we need to brace ourselves for the full impact of the global economic and financial crisis. To do so, it is imperative that our domestic financial market is kept stable. This is only possible if financial institutions are adequately capitalized and competently managed, and that the investing and depositing public has full faith and confidence in the system.

The financial system’s strength relies mainly on how diligently financial institutions perform their fiduciary duties, strictly abiding by the principles of good governance; on how closely regulators keep watch of these institutions to ensure protection of the public’s hard-earned savings; on how well investors and depositors exercise discretion and due diligence in choosing which bank or financial institution to entrust their funds with; and, when failure becomes inevitable, on how well the safety net works to cushion the fall.

Regulators play an important role in all four pillars of the financial system. They must not only be well equipped with the needed resources and infrastructure, and manned by the best and the brightest. They must also be given immunity from suits, except in cases of bad faith and grave abuse of discretion, to allow them to promptly and fully dispense their duties. The people who fail in their fiduciary responsibilities, particularly perpetrators of fraudulent schemes, must be prosecuted swiftly with diligent application of the full force of the law.

The CMDC strongly urges our legislators to enact laws that will reinforce the ability of regulators to fearlessly supervise financial institutions, and to promptly implement preventive and corrective actions in order to minimize the financial cost and the social trauma arising from failures of financial institutions. We recommend caution against the moral hazards that may be triggered by legislative acts that seek to enhance investor and depositor protection without the concomitant measures to raise standards of governance, strengthen regulations, promote investor vigilance, and enable safety net institutions to manage their risks.

Clearly, the brazen acts of rogue bankers to subvert the authority of regulators and abuse the protection presently afforded depositors cannot be allowed to continue. Prompt and strong legislative action is called for to restore public confidence and achieve the much-needed stability in the financial system.

CMDC Pushes for Seven Priority Legislative Initiatives to Spur Capital Market Development

The Capital Market Development Council (CMDC) during its chairmanship turnover rites last January 31, 2008 presented to media 7 legislative initiatives which they have prioritized in terms of bringing about sustainable investment growth.

The Council actively supports the prompt enactment of bills in the 14th Congress on the following measures:

1. Personal Equity Retirement Account (PERA) promotes voluntary long-term savings, otherwise spent on unproductive consumption, thru investments in PERA products designed to be locked for at least 5 years until retirement age of investor. Such long-term savings will be an important incremental source for domestic capital market growth. The measure will significantly contribute to (a) a stable retirement income architecture while addressing the pension needs of our overseas workers; (b) strengthening capital market development; and (c) lowering the cost of government borrowings via increasing demand for government securities. This initiative is backed up by a supportive tax structure as well as a clear, sound, harmonized and well-coordinated regulatory framework and standards.
2. Credit Information System Act (CISA) aimed at establishing a comprehensive credit information system, allowing financial institutions ready access to accurate and up-to-date credit information thru the proposed Central Credit Information Corporation. This is intended to improve the overall availability of credit, particularly to small borrowers, for which credit information are currently not readily available. It will also promote greater financial discipline as responsible borrowers will enjoy lower cost of credit. Furthermore, it will reduce excessive dependence on collateral to secure credit facilities.  
3. Collective Investments Schemes Law (CISL) formerly referred to as the Revised Investment Company Act (RICA), proposes amendment to the old Investment Company Act (Republic Act No. 2629). It seeks to institute reforms in the domestic investment company industry, including mutual funds. It aims to establish a comprehensive regulatory framework to enable investment companies to play a key role in capital formation. It also aims to promote the application of fiduciary principles in the investment management and administration of investment companies, as well as prevent its abuse thereby protect the interest of the investing public.
4. Financial Sector Taxation Reform (Fin Tax) features legislative and policy reforms anchored on the results of a study commissioned by CMDC toward a more tax-neutral financial system. This is meant to rationalize taxation to level the playing field as regards applicable tax on similar financial instruments offered by different financial institutions, thereby avoiding tax arbitrage.
5. Corporate Recovery and Insolvency Act (CRIA) focuses on the adoption of an effective rehabilitation and insolvency system for ailing companies. This recognizes creditor rights and provides a quick and orderly procedure in pursuing rehabilitation and liquidation of distressed enterprises. This will mitigate asset deterioration and allow assets otherwise tied up in the resolution process to immediately go back into the productive economic mainstream.  
6. Real Estate Investment Trust (REIT) seeks to provide a legal and regulatory framework and create a favorable market environment for real estate investment companies. It will mobilize financial resources and develop a market for medium-and long-term investment funds to finance the capital requirements of the real estate industry. It will provide both big and small investors additional investment alternatives, with adequate protection, and will enhance efficiency in the sector, as real estate development projects will be more professionally managed. (REITs are known globally to sell like stocks on the major exchanges and to invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.)
7. Land Administration Reform Act (LARA) will enable the consolidation of several land administration agencies into a single agency to address inefficiencies and bottlenecks in the land administration process. This will result in lower cost of doing business involving real estate and enhanced confidence in the land administration process. Rationalized and clear valuation standards and titling processes will reduce confusion, delays, minimize occurrence of spurious titles and cut red tape. All these will boost investments in real estate.

The CMDC is a private-government sector advocacy group, chaired by the Financial Executives Institute of the Phil. (FINEX) co-chaired by the Dept. of Finance (DOF)and the Securities and Exchange Commission (SEC). CMDC is focused on identifying and pushing for the introduction of policy reforms and enactment of vital legislative measures toward investment growth. The Council members are the FINEX, the DOF, the SEC, the Bangko Sentral ng Pilipinas, the Insurance Commission, the Phil. Stock Exchange, the Phil. Dealing System, the Bankers Assoc. of the Phil, the Investment House Assoc. of the Phil., the Phil. Life Insurance Assoc., the Phil Fed. of Pre-Need Plan companies and the Phil. Insurers and Reinsurers Assoc.

It’s new Chairman is Dave Balangue, SGV & Company Managing Partner, who succeeds former Monetary Board Member Melito Salazar.