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.