Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH Module 3 – Financial Regulation and the Central Bank Overview Financial regulation refers to the rules, standards laws operating in the financial industry, such as banks, credit unions, insurance companies, financial brokers and asset managers must follow. However financial regulation is more than just having rules in place – it’s also about the ongoing oversight and enforcement of these rules. In this module, these rules and standards will be discussed and how these regulations affect the financial sustainability of the firms and players in the industry. Module Objective • Clearly define financial regulation • Identify the top financial regulators in the Philippines • Discuss money supply and payment system Course Materials Financial Regulation Financial Regulation is a type of regulation whereby rules and standards were set to oversight the ability of the companies to establish and maintain appropriate level of capital to sustain its operation. It also includes setting controls over the market factors that will affect the financial sustainability of the firms and players in the industry. Regulations focus on providing stability to the financial system, fair competition, consumer protection, and prevention and reduction of financial crimes. Successful financial regulation prevents market failure, promotes economic stability, protects investors and improve market transparency. Regulatory environment is one of the elements of the Financial System. It is the governance body to ensure that the transactions that occur within the financial systems complies with the laws and regulations imposed to the actors as well as the elements that plays within the system. Financial systems are normally regulated by Central Banks. Market drivers regulated Market drivers refer to the factors that affect the market movement as well as the linking elements within it. These are the drivers in the market that led to failure in businesses, hence, proper regulation should be executed. • Competitiveness Government are duty bound to regulate competition in the environment. Firms is facing a high risk of sustainability in the future if they will not adjust to the competition. Government may provide support to the firms to enable them to compete should there are internal consideration or risk that they assume that can be passed on in other means. Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH • Market behavior Regulation will come into play to address failures in the market by setting parameters to ensure that firms will comply with certain standards to ensure integrity of the firms and level the playing field. The government normally sets: o Full disclosure of information o Prohibition on insider trading o Control of new players o Setting minimum of capital requirement • Consistency Consistency in the market is normally demonstrated to their information disclosures and policies. Government role is to set standards to regulate and ensure that information provided in the market are fair, consistent and conservative. • Stability Market stability is an external and fatal factor to be considered by the firms in the financial market. Most of the players failed to survive because their ability to forecast and to mitigate risk. In the financial market, the impact of financial risk is something that the regulatory environment should consider. The regulation must be able to protect the interest of the clients as well as the companies to enable their corporate sustainability. Regulators of Financial Activities Financial activities – activities that deals on funding certain transaction or expenditures. In financial markets, financial activities are focused on the trading or securities and financial instruments. Financial activities regulation – setting rules to set standards, control and order on the financial activities In Philippine setting, the financial regulation is observed by the following, but not limited to the following: • Bangko Sentral Ng Pilipinas (BSP) BSP is created under the New Central Bank Act or Republic Act 7653 and an attached agency of the Department of Finance. Under the Philippine Law, this will act as the central monetary authority which will act as a corporate body that is responsible concerning money, banking and credit. BSP shall provide policy directions in these areas. It is also responsible for the supervision of financial institutions and exercise regulatory powers. Functions: o Liquidity management The BSP formulated and issues monetary policy aimed at influencing money supply in order to maintain price stability. o Currency issues Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH The sole responsibility to issue notes and coins representing the national currency for the Philippines. o Lender of last resort BSP acts as the provider of discounts, advances and financial support to financial institution for them to maintain their liquidity. o Financial supervision BSP regularly supervises the financial institutions and is empowered to exercise regulatory powers over non-bank institutions conducting quasi-banking functions. o Management of foreign currency reserves Manages the financial foreign currency requirement of the Republic by ensuring sufficient international reserves will be made available on time. o Determination of exchange rate policy BSP sets the policy that will determine the rate of exchange of Philippine Peso over different currency. o Other activities as banker, financial advisor and official depository of the Government and its instrumentalities BSP shall be governed by the Monetary Board. The Monetary Board is composed of 7 members: (All can only be re-appointed once). 1 Chairman – Governor of the BSP 1 Member – member of the cabinet designated by the President of the Republic 2 Members – came from private sector (shall serve for a term of two months) 3 Members – came from private sector (shall serve for a term of six months) Governor acts as the Chief Executive Officer of the BSP, supported by four sectors: 1 Financial Supervision Sector – responsible mainly for the supervision and regulation of banks and other financial institutions under the scope of BSP 2 Monetary and Economics Sector – aims to conduct the formulation of monetary policy, ensure its implementation and assess its effectiveness. 3 Currency Management Sector – will be responsible in the production, distribution, disposal or retirement of currencies in the Philippines including security documents, commemorative medals and medallions 4 Corporate Services Group – the support group of BSP that conducts the human capital management, financial services, information technology support and other corporate resource management. Watch: • About the Bangko Sentral ng Pilipinas ( https://www.youtube.com/watch?v=5yv1QCkCUpY ) • Insurance Commission (IC) Insurance Commission by virtue of Executive Order No. 192 s. 2015 to ensure enforcement of the provisions of the Insurance Code or Republic Act 10607 i.e. to regulate and supervise the insurance, pre-need, and health maintenance organization industry. It is governed by Department of Finance that supervises and regulates the operations of life and non-life companies, mutual benefit associations and trusts for charitable uses. Functions: o Promulgation and implementation of policies, rules and regulations governing the operations of entities engaged in insurance, pre-need and HMO activities as well as benevolent features Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH o Licensing of insurance, reinsurance companies, its intermediaries, mutual benefit associations, trusts for charitable uses, pre-need companies, pre-need intermediaries, and HMO companies o Conducting insurance agent’s examinations, as well as processing of reinsurance treaties and requests for investments of insurance companies o Examination/verification of the financial condition and methods of doing business of entities engaged in insurance business, pre-need, mutual benefit associations, trusts for charitable uses and HMO companies o Evaluation and preparation of statistical reports, studies, researches, annual reports and position papers relative to insurance, pre-need matters and HMO matters. o Review of premium rates imposed by life and nonlife companies, mutual benefit associations; statistical reports of adjusters to determine compliance with established standards. o Adjudication of claims and complaints involving loss, damage or liability incurred by an insurer under any kind of policy or contract of insurance or suretyship. o Review and approval of all life and non-life policies, pre-need and HMO plans before sale to prospective clients. Watch: • What is the role of the Insurance Commission? ( https://www.youtube.com/watch?v=euI-WhqzSMo ) • Philippine Securities and Exchange Commission (SEC) The SEC is the national government regulatory agency to administer oversight on the corporate sector, capital market participants and securities and investment instrument and promote corporate governance over these. It was created on October 26, 1936 under the Commonwealth Act no. 83 In the Republic Act 8799 or the Securities Regulation Code, widens the responsibility and scope of the SEC to include the following: o Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or permit issued by the Government o Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto o Approve, reject, suspend, revoke or require amendments to registration statements and registration and licensing applications o Regulate, investigate, or supervise the activities of persons to ensure compliance o Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs. (self-regulating organization) o Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto o Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders o Enlist the aid and support and/or deputize and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm association or person in the implementation of its powers and functions under this Code. o Issue cease and desist orders to prevent fraud or injury to the investing public Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH o Punish for contempt of the SEC, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Conduct o Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision o Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and secure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws. o Suspend or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon and of the grounds provided by law; and o Exercise such other powers as may be provided by law as well as those which maybe implied from, or which are necessary of incidental to the carrying out of, the express powers granted the SEC to achieve the objectives and purposes of these laws. Watch: • Securities and Exchange Commission (Philippines) ( https://www.youtube.com/watch?v=haVNMQ_AYus&t=83s ) • Board of Investments (BOI) BOI is the lead agency to promote investment in country and thereby generate local and foreign investment in the country. It is an attached agency of Department of Trade and Industry. The agency provides advisory, actualization and post services to the investors. BOI provides the following services to encourage new investments: o Providing information for the knowledge-based research o Incentivize the investors through the provision of tax holidays, tax and duty exemption of imported capital equipment, etc. o Participate through policy advocacy initiatives to ensure that the laws and regulations are investment friendly. Watch: • Board of Investments Philippines ( https://www.youtube.com/watch?v=9a4eHKWEw6E ) Money Supply and Payment System Money Supply - the availability of financial resources for deployment in the financial system. It is the making the money available for use or for trade or investment. This is balanced with the monetary demand of the market. The balance of money supply and demand is managed by the Central Bank. For the case of the Philippines, it is the Bangko Sentral ng Pilipinas. Forms of Money: • Cash (Coins and bills) • Demand deposits (money deposited in bank account) • Other financial instruments (Treasury bills, commercial paper) Regulation of Circulation of Notes ✓ The BSP is authorized by the Republic under R.A. 7653 that they have the sole power to issue currency within the territory of the Philippines. Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH ✓ No one is allowed to issue or reproduce any document or object for general monetary circulation ✓ Violators will be facing with imprisonment of no less than five (5) years but not more than ten (10) years, greater penalty may be imposed depending on the gravity pursuant to the Revised Penal Code of the Philippines Bank, including their branches must observe the following for Deposit of their notes: ✓ Bank shall classify their cash deposits and sorted by series and denomination. They should classify it according to: Clean or fit notes Dirty or unfit notes ✓ Banks shall provide securely sealed bags or containers separately for the clean or fit notes and for the dirty or unfit notes accompanied by a deposit slip for each type/category. The deposit slip for the unfit currency notes shall be clearly labeled as “unfit.” ✓ Handling of deposits, banks’ deposits shall be packed in sealed bags or containers in standard quantity of twenty (20) full bundles per denomination. Each bundle containing 1,000 notes in 10 equal straps. Each strap containing 100 notes. ✓ Banks located in the provinces may make direct deposits of currency notes, duly identified and sorted, with the nearest BSP regional office/branch. For those without regional offices available, they may arrange it with their respective head offices to be shipped to BSP in Quezon City. The cost shall be borne by the bank concerned. ✓ Banks shall incorporate measures on the implementation thereof in their compliance program Deposit of their coins: ✓ Coins shall be free from adhesive tapes ✓ Coins shall be sorted into fit, unfit or mutilated per denomination and per series ✓ Each bag of coins shall contain the following standard number of pieces and amount per denomination Denomination Quantity (Pieces) Value P10.00 1,200 P12,000.00 P 5.00 1,500 7,500.00 P 1.00 2,000 2,000.00 P .25 3,000 750.00 P .10 4,500 450.00 P .05 5,000 250.00 P .01 5,000 50.00 Unfit notes and coins Notes and coins shall be considered unfit for circulation when: Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH Unfit notes It contains heavy crinkles which break the fiber of the paper and indicate that disintegration of the note has begun It is badly soiled/contaminated and/or with writings even if it has proper life or sizing It presents a limp or rag-like appearance and/or it cannot sustain its upright position when held at the mid-portion of one of the shorter borders Unfit coins It is bent or twisted out of shape or defaced or show signs of corrosion, but its genuineness and/or denomination can still be readily and clearly determined/identified It has been considerably reduced in weigh by natural abrasions/wear and tear These currencies are no longer allowed to be used for circulation but may be presented for exchange to or deposited with any bank. The reason that the BSP will accept these currencies are as follows: ✓ The notes and coins can no longer be identified ✓ The coins have indication of filing, clipping or perforation ✓ Notes which have lost more than 2/5 of their surface or all of the signatures inscribed thereon ✓ Notes which are split edgewise resulting in the loss of the whole of or part o either the face or back portion of the banknote paper; or ✓ Notes where the Embedded Security Thread or Windowed Security Thread placed thereon is completely lost except when the damage appears to be caused by wear and tear, accidental burning, action of water or chemical or bites of insects etc. Purchasing Power is the value of a currency in terms of the goods or services that one unit of it can buy. It is practically based on the consumer price index (CPI). Consumer Price Index – the weighted average value of the basket of prices of all commodities representing the market. Commodity group in the CPI: • Food and non-alcoholic beverages • Alcoholic beverages and tobacco • Clothing and footwear • Housing, utilities and other fuels • Furnishing and maintenance costs • Health • Transport • Communication • Recreation and Culture • Education • Restaurant and miscellaneous Inflation rate – the degree of movement of the CPI from a period to another. the measure of the increase or rate of increase in the general price of selected goods and services over a determined period of time. Inflation = CPI 1 CPI 0 - 1 x 100% Where CPI 1 = Current price index; CP0 = Base Price index Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH Example 1: CPI for years 1 and 2: Y1 = 112; Y2 = 116 Inflation 116 112 = = .0357 x 100% = 3.57% - 1 x 100% This means that the prices went up by 3.57%. Example 2: In Merryland, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices of these goods in 1980, 1990, and 1991: 1980 1990 1991 Popcorn P1 P1 P1.05 Movie shows 5 10 10.50 Diet drinks .70 .80 .75 A “market bundle” for a typical family is deemed to be 5 popcorn, 3 movie show, and 3 drinks. CPI for each of the three years, using 1980 as the base year: cost of buying the market bundle in 1980 80 cost of buying the market bundle in 1980 (5x1) + (3X5) +(3x.70) (5x1) + (3X5) +(3x.70) 100 cost of buying the market bundle in 1990 CPI = 90 cost of buying the market bundle in 1980 (5x1) + (3X10) +(3x.80) (5x1) + (3X5) +(3x.70) 169.20 cost of buying the market bundle in 1991 CPI = 90 cost of buying the market bundle in 1980 (5x1.05) + (3X10.50) +(3x.75) (5x1) + (3X5) +(3x.70) 176.50 The rate of inflation from 1990 to 1991 CPI = x 100% x 100% x 100% x 100% x 100% x 100% Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH Inflation 176.50 169.20 = = .0431 x 100% = 4.31% - 1 x 100% For the purpose of regulation, BSP finds its way to control inflation and enable continuous flow of funds in the market. Philippine Statistics Office is the body that determines the current inflation based on the current movement of the commodities set as index in the market. Two types of inflation: • Core inflation Used for most of the economic estimates where it excludes in the equation the movement of the commodities or incidents with very volatile movement or outliers • Headline inflation Captures the changes of the cost of living based on the movement of the basket of commodities as a whole Payment System Is a set of interrelated processes of settlement of goods or services rendered in exchange for a set of instruments that will undergo either a banking or non-banking procedures. Characteristics for an Effective Payment System According to BPS, a payment system normally requires the following: • Standard methods of Transmitting Payments The conventional way of transmitting payment is the literal arm’s length exchange of transaction whereby the seller or the obligor deliver the goods or render service while the other party will deliver the instance. o Electronic banking or e-banking system - fund transfer or online payment. • Agreed means of settlement Parties should agree on the manner on how payment is to be rendered. o Normal means of settlement: Cash or cheque payment Online payment Automated teller machine Fund transfer Credit cards Debt cards and stored valued cards Electronic money Manual Money Transfer Playbox System Cash deposit Assignment • Common Operating Procedures and rules Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Branches and Satellite Campuses BATAAN BRANCH Like means of settlement, the operating procedures and rules should be understood and mutually accepted by both parties. Importance of Payment System • Safe and Real Time transactions • Effective risk management • Facilitates Financial market transactions. Activities / Assessments 1. Explain the importance of financial regulation in financial system, 2. Discuss the functions of different financial regulators in the Philippines. 3. What is payment system? What different forms of payment can we use today? 4. In Merryland, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices of these goods in 1980, 1990, and 1991: 1980 1990 1991 Popcorn P1 P1 P1.05 Movie shows 5 10 10.50 Diet drinks .70 .80 .75 A “market bundle” for a typical family is deemed to be 5 popcorn, 3 movie show, and 3 drinks. Compute CPI for each of the three years, using 1990 as the base year. 5. What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (4)? True or False (page 91-93)
