Philippines: Capacity Development of Financial Regulators

Sovereign Project | 44255-012

Summary

The TA will supplement and support policy actions agreed to under the Post Program Partnership Framework (P3F) of the Financial Market Regulation and Intermediation Program, Subprogram 2 (FMRIP-02). Its impact will therefore mirror that of FMRIP-02, which is an increase in the contribution of the nonbank financial sector to economic growth. The outcome of the TA will be a deeper, more diversified, and more resilient financial sector. The proposed TA will have two main areas of focus: (i) improving the governments capacity to facilitate capital market development, and (ii) strengthening regulatory and supervisory capacity.

Latest Project Documents

Title Document Date
Capacity Development of Financial Regulators Dec 2011

Consulting Notices

See also: CMS

No notices are currently available for this project.

Procurement Notices

See also: Operational Procurement

No notices are currently available for this project.

Procurement Documents

No documents of this type are currently available for this project.


Project Data Sheets (PDS) contain summary information on the project or program. Because the PDS is a work in progress, some information may not be included in its initial version but will be added as it becomes available. Information about proposed projects is tentative and indicative.

The Public Communications Policy (PCP) recognizes that transparency and accountability are essential to development effectiveness. It establishes the disclosure requirements for documents and information ADB produces or requires to be produced.

The Accountability Mechanism provides a forum where people adversely affected by ADB-assisted projects can voice and seek solutions to their problems and report alleged noncompliance of ADB's operational policies and procedures.

In preparing any country program or strategy, financing any project, or by making any designation of, or reference to, a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

Project Name Capacity Development of Financial Regulators
Project Number 44255-012
Country Philippines
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8038-PHI: Capacity Development of Financial Regulators
Japan Fund for Poverty Reduction US$ 1.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Sector / Subsector

Finance - Finance sector development

Gender Equity and Mainstreaming Some gender elements
Description

The TA will supplement and support policy actions agreed to under the Post Program Partnership Framework (P3F) of the Financial Market Regulation and Intermediation Program, Subprogram 2 (FMRIP-02). Its impact will therefore mirror that of FMRIP-02, which is an increase in the contribution of the nonbank financial sector to economic growth. The outcome of the TA will be a deeper, more diversified, and more resilient financial sector. The proposed TA will have two main areas of focus: (i) improving the governments capacity to facilitate capital market development, and (ii) strengthening regulatory and supervisory capacity.

Efforts to encourage the development of the capital markets will include recognized and specific activities to create an enabling environment as well activities to build consensus across a varied stakeholder base to implement specific agreed upon solutions to long-standing development constraints. Such collaboration is a prerequisite to solving the more technical constraints to development and represents a continuation of ADBs engagement with the government over the past 12 months. Specifically, an international capital market expert will be retained to assist in the development of a comprehensive, sector wide implementation road map to support the Capital Market Development Plan (CMDP), and will assist the Government in resolving conflicts between stakeholders. To provide an enabling environment for long term savings, and at the same time increase the supply of capital market products, the TA will support the implementation of the Personal Equity Retirement Account (PERA) Act of 2008 and will provide for a comprehensive review and revision of the regulations for securities issuance and distribution. Finally, the TA will improve the investment climate by funding the development of a corporate governance scorecard linked to the Maharlika program of the Philippine Stock Exchange.

Activities to strengthen regulatory capacity will address the more pressing operating weaknesses within the Securities and Exchange Commission (SEC) and Insurance Commissioner (IC) as a prelude to establishing greater operating and fiscal autonomy in nonbank regulatory agencies. The activities in this component will improve inter-regulatory cooperation and reduce the opportunity for regulatory arbitrage by backing the governments efforts to harmonize prudential supervision through a common training platform in the Financial Sector Forum (FSF). The activities in this component will also assist the SEC in achieving efficiency gains by streamlining and automating the corporate registration process. The TA will directly strengthen the SECs capacity to conduct market surveillance and to prosecute violations of the Securities Regulation Code. In addition, this component will strengthen the SECs ability to supervise collective investment schemes and SROs, and to ensure that financial reporting complies with International Financial Reporting Standards to improve transparency.

Project Rationale and Linkage to Country/Regional Strategy

Past efforts to develop the Philippine capital markets have been undermined in part by insufficiently comprehensive planning and direction, and by a lack of consensus. The previous capital market development blueprint (2005 to 2010) was drawn up by the SEC, and participation in its drafting and implementation favored the SEC and the Philippine Stock Exchange, a SEC regulated entity. The private sector contributed little to the plan, which turned out to be overly prescriptive. To improve planning and coordination, the government has released a CMDP, which it is implementing through the Philippine Development Plan for 2011 to 2016. With the CMDP, the government looks forward to easing key development constraints by consolidating the government debt markets, developing a risk-free yield curve, accelerating growth in the contractual savings industry, continuously developing the capacity of financial regulators, rationalizing and harmonizing financial sector taxes, and improving infrastructure (physical, legal, and governance, such as the credit information bureau, which is currently inactive). Implementing the CMDP, however, demands close coordination and collaboration between agencies like the Treasury, the Bangko Sentral ng Pilipinas (BSP, the central bank), the Department of Finance (DOF), the SEC, and the private sector. Shared goals must be established and mutually dependent responsibilities assigned. Disputes between stakeholders must be carefully settled. Issues surrounding the primary and secondary government debt market must first be resolved to improve efficiency and pricing. The government can then push other reforms to remove barriers to stock listing and the flotation of corporate debt securities. Consultations have confirmed the distinct cost advantage of bank loans relative to securities with their highly complex and costly process of issuance and distribution. At the same time, the government will need to provide an enabling environment for long term savings while ensuring governance reforms and adequate protection for small savers.

Despite considerable improvements in quality and coordination, financial sector supervision continues to be hampered by weaknesses, which dampen investor confidence. There are three separate regulators: the BSP for the banking sector; the SEC for the nonbank subsector; and the IC for the insurance subsector. The FSF, formed in 2004, has strengthened coordination. But gaps in regulatory capacity and coverage and poor enforcement of coordination arrangements have induced regulatory arbitrage among financial entities. Closing these gaps is a priority for the FSF, and it is expected to succeed eventually in this goal. For now, however, supervision remains uneven. Immediate efforts must be made, both to increase capacity and to set the stage for improved cooperation and information sharing. Better coordinated approaches to supervision and regulation must be found for complex financial conglomerates and the common products delivered by unaffiliated providers across the financial subsectors.

A lack of fiscal and administrative autonomy has given rise to persistent operating weaknesses in the SEC and IC. A limited budget and demanding noncore functions have curbed the capacity of SEC staff to address higher value core functions. An inefficient corporate registration process is one particular consequence of inadequate budgets. Routine corporate registrations, which have greatly increased in volume, are still processed manually and use paper based routines. Resources have to be diverted from other departments at times to allow corporate registration renewals to be processed during peak periods. This processing burden has in turn delayed efforts to build and maintain an effective market surveillance and on-sight examination functions. The 2010 corporate governance report from leading independent brokerage and investment group CLSA Asia-Pacific Markets noted both anecdotal and more concrete evidence of weaknesses in the SECs oversight and supervision of market practices, including market integrity and financial reporting. Market participants have likewise noted a need for a more comprehensive review of the Philippine Dealing and Exchange Corporation, which is the sole self regulatory organization (SRO) for the bond market, due to the high costs of trading through the SRO. Finally, the lack of budget support has compounded these problems by compromising the SECs ability to retain and develop staff that would allow it to provide an enabling, financially stable environment for capital market development.

With the onset of the global financial crisis, the Government of the Philippines realized that these long-standing weaknesses in governance and administration in the SEC and IC must be addressed to improve supervision of the financial markets. Further, a recent Financial Sector Assessment Program of the International Monetary Fund (IMF) also brought out the need for a more developed capital market. The government has therefore made financial sector reform a priority and taken the first step of appointing key champions of reform to lead the nonbank financial regulators. Recent missions have likewise noted a growing consistency between the government, the Asian Development Bank (ADB), and a wide range of stakeholders, including the private sector, in their identified development constraints and reform priorities. To build on this momentum for reform, the government has requested ADB technical assistance (TA) to address these issues and to continue the reform effort as envisioned in the P3F of FMRIP-02.

Impact Increased contribution of the nonbank financial sector to economic growth
Project Outcome
Description of Outcome A deeper, more diversified, and more resilient nonbank financial sector
Progress Toward Outcome The project had a single outcome; total local currency bonds to increase to 38% of GDP by December 2013. The project has essentially acheived this outcome as the Philippines local currency debt market currently represents 39% of GDP. However, many of the Philippines more advanced regional peers have local currency debt markets that exceed 70% of GDP, with local currency corporate debt markets ranging in size from 3 to 8 times that of the Philippines.
Implementation Progress
Description of Project Outputs

Stronger regulatory oversight and enforcement in the financial sector

Improved capacity for capital market development

Status of Implementation Progress (Outputs, Activities, and Issues)

The TA is in an advanced state of implementation. Two separate firms were retained to i) improve execution of the capital market blueprint, and ii) strengthen the capacity of the Securities and Exchange Commission (SEC). In the first segment, a national firm was retained to provide regional benchmarking exercises for the Philippines debt and equity markets to identify constraints to the further development of the market. These exercises provided useful feedback to support the legislative and regulatory rule setting process. However, the TA disclosed that the Capital Market Development Council, which serves as the lead to coordinate development efforts, is all but ineffective. Basically, participants focus exclusively on their own vested interests, which tends to be product centric and to the deterimant of wider market development. For example, the government bond market remains illiquid, due partially to a very high cost and redundant trade reporting infrastructure, and the lack of an effective repo mechanism. The existing repo agreement, which is favored by select market participants, does not reflect international standards in that title transfer is not assured. Thus, the document attracts a higher cost of usage given the lack of close-out netting and the application of a documentary stamp tax, making it uneconomical. Inherent conflicts of interest in the construct of the Capital Market Development Council serve to perpetuate this situation.

Support to the SEC encompased a variety of components but focused on enhancing surveillance, supervision and investigation. Diagnostics were completed, manuals were developed and delivered, and on-site training was provided. In addition, the firm provided advice to strengthen the SEC's oversight of SRO's. While the engagement was considered productive, the SEC's effectiveness is partially compromised by outdated and draconian bank secrecy laws, to which work-arounds are available, and the inability of the SEC to access phone records, to which work-arounds are not available. In addition, the firm provided technical advice and capacity development to improve the SEC's ability to review the financial statements of publically listed companies for adherence to Philippine Accounting Standards.l

An integral component of the TA's implementation is the establishment of the PERA Contributor's Database. Equipment and software needed for the establishment of the database is in place and user acceptance trainings conducted by Asiagate experts to the relevant BSP personnel are on-going. Programming, testing activities, and system enhancement based on the results of the testing activities are also on-going. product launch is expected by the end of the second quarter.

Finally, the TA supported a number of incidental projects including attendance at training seminars, resource speakers utilized in connection with efforts to introduce the Global Master Repurchase Agreement, and a diagnostic to determine if a shared IT service centre for rural banks was economically feasible.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design Three TA projects were completed to support project planning that included wide stakeholder participation from both the public and private sectors.
During Project Implementation
Business Opportunities
Consulting Services ADB will hire consultants through quality- and cost-based selection (80:20), according to its Guidelines on the Use of Consultants (2010, as amended from time to time). National experts will be hired for implementation and capacity development in support of the launch of the PERA (output 1) and for the automation of SEC licensing and registration (output 2). International experts will provide the remaining TA services (outline terms of reference are in Appendix 3). Expressions of interest solicited from qualified consulting firms will establish the appropriate packaging of the consulting services (one or several packages, depending on market testing). Disbursements under the TA will conform to ADB's Technical Assistance Disbursement Handbook (2010, as amended from time to time).
Responsible ADB Officer Stephen Schuster
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SERD
Executing Agencies
Department of FinanceDOF Building
Bangko Sentral ng Pilipinas Complex
Roxas Blvd., Manila, Philippines
Timetable
Concept Clearance 16 Jun 2011
Fact Finding 06 May 2011 to 06 May 2011
MRM -
Approval 16 Dec 2011
Last Review Mission -
Last PDS Update 31 Mar 2015

TA 8038-PHI

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
16 Dec 2011 15 Feb 2012 15 Feb 2012 31 Dec 2013 31 Dec 2015 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 1,000,000.00 200,000.00 0.00 0.00 0.00 1,200,000.00 16 Dec 2011 897,494.28
Title Document Type Document Date
Capacity Development of Financial Regulators Technical Assistance Reports Dec 2011

Safeguard Documents

See also: Safeguards

No documents found.

Evaluation Documents

See also: Independent Evaluation

No documents found.


The Public Communications Policy (PCP) establishes the disclosure requirements for documents and information ADB produces or requires to be produced in its operations to facilitate stakeholder participation in ADB's decision-making. For more information, refer to the Safeguard Policy Statement, Operations Manual F1, and Operations Manual L3.

Requests for information may also be directed to the InfoUnit.