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Memo No. M-2016-04 — Reminder on Sound Risk Management Practices when Dealing with Foreign Exchange Dealers, Money Changers, and Remittance Agents

7 April 2016

TO: All Rural Banks
RE: MEMORANDUM No. M-2016-04 – REMINDER ON SOUND RISK MANAGEMENT PRACTICES WHEN DEALING WITH FOREIGN EXCHANGE DEALERS, MONEY CHANGERS AND REMITTANCE AGENTS

Dear Rural Bankers,

Pursuant to Part 8 of the Manual of Regulations for Banks (MORB), banks dealing with foreign exchange dealers, money changers and remittance agents (FXDs, MCs and RAs) should take extra caution and vigilance and shall perform consistent with regulations and the bank’s procedures as provided under its Money Laundering and Terrorist Financing Prevention Program (MLPP). The bank’s MLPP should contain appropriate risk management practices to ensure that money laundering (ML) and terrorist financing (TF) risks arising from dealings with FXDs, MCs, and RAs are effectively identified, assessed, monitored, mitigated, and controlled. To this end, banks should ensure the soundness and adequacy of their risk management policies and practices in dealing with FXDs, MCs, and RAs, which include, among others, the following:

1. Banks shall only deal with FXDs, MCs and RAs registered with the BSP for the appropriate authority to engage in a specified business;

2. When dealing with RAs as remittance partners or tie up or if the accounts are being used to facilitate their business, the banks have the ultimate responsibility for conducting appropriate due diligence necessary to the relationship to ensure that it will not be used as channel for ML/TF activities. Bank’s tie-up relationship with such customers shall not be used to circumvent existing regulations;

3. Conduct risk assessment of the FXD, MC and RA customers, considering relevant factors such as business operations, types of customers, product/service availed, distribution channel, jurisdictions they are exposed to and expected account activity. By the nature of their business, they may inherently pose higher ML/TF risk which should be appropriately identified, monitored and mitigated;

4. Perform enhanced due diligence. Unsatisfactory result of the due diligence process shall be a ground for denying the business relationship.

5. Perform continuing account and transaction monitoring.

Banks are reminded that violation of the rules provided in Part 8 of the MORB shall be subject to applicable sanctions and penalties provided under Section X811 of the MORB.

For guidance and strict compliance.

You may also view/ download full copy of this memo through this link: https://rbap.org/wp-content/uploads/2016/04/m004.pdf

RBAP Secretariat

BSP Circular No. 900: Guidelines on Operational Risk Management

20 January 2016

TO: All Rural Banks
SUBJECT: CIRCULAR NO. 900 – GUIDELINES ON OPERATIONAL RISK MANAGEMENT

Dear Rural Bankers,

The Monetary Board in its Resolution No. 2115 dated 18 December 2015, approved the following guidelines on operational risk management for BSP supervised financial institutions and amendments in the Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank Financial Institutions (MORNBFI).

Section 1. Sections X179/4179Q/ 4198N/ 4179T are hereby added to the MORB/MORNBFI to read as follows:

Policy Statement. It is the thrust of the Bangko Sentral ng Pilipinas (BSP) to promote the adoption of effective risk management systems to sustain the safe and sound operations of its supervised financial institutions (BSFIs). Cognizant that operational risk is inherent in all activities, products and services, and is closely tied in with other types of risks (e.g., credit, liquidity and market risks), the BSP is issuing these guidelines to clearly set out its expectations and define the minimum prudential requirements on operational risk management. These guidelines align existing regulations to the extent possible, with international standards and best practices. BSP expects its BSFIs to adopt an operation risk management framework, as part of the enterprise-wide risk management system, that is suited to their size, complexity of operations, and risk profile.

Section 2. Subsections Xl79.t/4t79Q.t/4L9BN.L/4L79T.1 shall read as follows:

Definition of Operational Risk. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems; or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Operational risk is inherent in all activities, products and services, and cuts across multiple activities and business lines within the financial institution and across the different entities in a banking group or conglomerate where the financial institution belongs.

Section 3. Subsections X179.2/4179Q.2/4198N.2/4179T.2 shall read as follows:

Duties and Responsibilities
a. Board of Directors. Consistent with the principles embodied under Subsection X141.3 of the MORB, the duties and responsibilities of the Board of Directors in relation to the effective management of risk include the establishment of comprehensive and effective operational risk management framework as part of the enterprise-wide risk management system. In this regard, the board of directors shall:

1. Ensure that it is aware of and understands the nature and complexity of the major operational risks in the BSFI’s business and operating environment, including risks arising from transactions or relationships with third parties, vendors, suppliers including outsourced service providers, and clients of services provided. This should include understanding of both the financial and nonfinancial impact of operational risk to which the BSFI is exposed to;

2. Approve the operational risk management framework which shall form part of the BSFI’s enterprise-wide risk management system and shall cover all business lines and functions of the BSFI, including outsourced services and services provided to external parties. The operational risk management framework should include an enterprise-wide definition of operational risk, which should be consistent with the definition under section 2 of this circular, governance, and reporting structures including the roles and responsibilities of all personnel, feedback mechanism, as well as standards and tools for operational risk management. In this respect, the board shall:

a. Define the operational risk management strategy and ensure that it is aligned with the BSFI’s overall business objectives. Relative to this, the board should set and provide clear guidance on the BSFl’s operational risk appetite (i.e. the level of operational risk the BSFI is willing to take and able to manage in pursuit of its business objectives as well as the type of risks that are not acceptable to the board and management), which should consider all material risk exposures as well as the BSFl’s financial condition and strategic direction;

b. Approve appropriate thresholds or limits to ensure that the level of operational risk is maintained within tolerance and at prudent levels and supported by adequate capital. Relative to this, the board shall approve policy on resolving limit breaches which should cover escalation procedures for approving or investigating breaches, approving authorities, and requirements in reporting to the appropriate level of management or the board;

c. Ensure that operational risk is appropriately considered in the capital adequacy assessment process;

d. Ensure that it receives adequate information on material developments in the operational risk profile of the BSFI, including pertinent information on the current and emerging operational risk exposures and vulnerabilities as well as information on the effectiveness of the operational risk management framework. The board must challenge the quality and comprehensiveness of the reliability of the said information and the monitoring system for operational risk;

e. Ensure that business objectives, risk appetite, the operational risk management framework, and the respective roles and responsibilities of personnel and officers at all levels in terms of implementing the operational risk management framework, are properly disseminated, clearly communicated/discussed, and understood by personnel concerned;

f. Provide senior management with clear guidance and direction regarding the principles underlying the operational risk management framework. The board shall ensure that senior management appropriately implements policies, processes and procedures, and provides feedback on the operational risk management process. In this regard, the board shall establish a feedback and reporting system that will allow employees to raise their concerns without fear of negative consequences; and

g. Ensure that the operational risk management framework is subject to effective and comprehensive independent review, on a periodic basis, by operationally independent, appropriately trained, and competent staff to ensure that it remains commensurate with the BSFl’s risk profile and continues to be adequate and effective in managing operational risk. The review should take into account the changes in business and operating environment, material changes in systems, business activity or volume of transactions, quality of control environment, effectiveness of risk management or mitigation strategies, loss experience, and the frequency, volume or nature of breaches in limits or any policy.

3. Provide adequate oversight on all outsourcing activities and ensure effective management of risks arising from these activities. In this regard, the board of directors shall approve a framework governing outsourcing activities, which includes a system to evaluate the risk and materiality of all existing and prospective outsourcing engagements and the policies that apply to such arrangements;

To view full copy of the guidelines, please refer to the attachment.
c900- Guidelines on Operational Risk Management

Thank you.

RBAP Secretariat

Building financial capabilities through m-banking

Rural banks already play a big role in small communities. They serve over one million low-income families who trust them for microinsurance, loans, savings and other crucial banking services that help them build a financial foundation to support themselves and their families.

As such, it is important that these services are made readily available and accessible to the poor in remote places, where a vast majority of rural bank clients’ are situated. By improving access to financial services, rural banks represent a key component to the government’s vision of inclusive growth by reaching a wider number of clients while effectively saving on costs.

In fact, since mobile banking was introduced in 2006, the rural banking industry has been able to process more than P16 billion in mobile money transactions, involving almost 100 rural banks and their 1,200 branches and other banking offices.

Through its Microenterprise Access to Banking Services program or MABS, the Rural Bankers Association of the Philippines (RBAP) assisted member-banks to increase the financial services offered to small farmers, fisherfolks and small and micro-entrepreneurs by providing microfinance technical assistance and training.

On the other hand, trained banks develop their products and services–such as loans, deposits, and money-transfer services, to name a few–to specifically suit the needs and requirements of the poor. One of the tools constantly utilized by rural banks is mobile banking.

While bigger banks have been investing in their own ATMs, most rural banks have partnered with a third party ATM provider such as ENCASH and offering a GCash and Smart Money-enabled ATM card services to their customers. Mobile money-enabled services, SMS banking, Point of Sale systems, cash cards, ATM cards, and prepaid debit cards are technologies that are now within the grasp of rural banks.

Improved banking services are likewise complimented by regulations that provide greater opportunities for rural banks to grow and expand both their services and their market reach.

Already, rural banks and their clients have a strong relationship; there are challenges that need to be addressed. One is building awareness amongst banks, cash-in/cash-out partner merchants and clients of the benefits of mobile phone banking services; and two, ensuring that banks maintain a close and continuous relationship with their clients and seeing to it that they are updated on the various new services that will make their financial situations easier and more productive.

Recently, MicroFinance Opportunities (MFO) has developed an online Course and Toolkit aimed at supporting branchless banking providers interested in incorporating Consumer Education as part of their adoption strategies. This Toolkit gathers lessons learned and insights from the implementation of a Consumer Education for Branchless Banking (CEBB) Program in India, Zambia and Philippines.

Practitioners will be able to use the Toolkit to identify the challenges their customers face as they adopt their branchless banking service and determine how consumer education can help to address them. The steps and guidance provided in the Toolkit will then enable practitioners to design a successful consumer education strategy for their branchless banking services.

Branchless banking is important because it allows microfinance institutions to serve more clients at lower cost, increases reach into areas where a full branch would not be cost-justified, and allows clients to access their accounts more frequently and manage their loan funds more easily. It likewise enables clients to access their funds closer to their homes or businesses through automated teller machines (ATMs), for instance, which implies less waiting time, less travel time to the service outlet, and 24 hour a day access to their funds.

Last March 7, MFO, together with the RBAP and its technical arm, the Rural Bankers Research and Development Foundation, Inc. (RBRDFI), launched the first run of the CEBB training at the Asian Institute of Management Conference Center Manila. The event – attended by various member rural banks and microfinance institutions and cooperatives – was graced by representatives from the Bangko Sentral ng Pilipinas, USAID, and the Asian Development Bank. The next run will be sometime May 2014.

A matter of trust

Banking is a business of trust.

It involves money, which is important to practically everybody, and anything important ought to be protected and entrusted only to those worthy.

Among the poor, the trust in rural banks has always been there and continuously builds up steadily as these community-based financial institutions have shown the capability to not only protect the financial interest of their clients, but also the willingness and confidence to adopt new technologies and banking techniques to continuously improve services.

In the 2014 Annual Management Conference of the Confederation of Central Luzon Rural Banks (CCLRB), key personalities in the banking industry and its corporate partners will share some valuable inputs on how rural banks can be more competitive in today’s environment.

That even in the face of the unrelenting dominance of the bigger universal and commercial banks, as well as the possibility of financial integration taking shape soon, rural banks can remain relevant by investing in scalable technology to be more efficient and profitable.

Aside from this, the speakers will point out that it is imperative for rural banks to continue professionalizing their management and develop strategic alliances with other financial service providers to leverage their reach.

The latter will come into play with the recent extension of the Strengthening Program for Rural Banks Plus, a joint measure by the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corp. that offers financial and regulatory incentives to those that will engage in mergers and acquisition.

Meanwhile, another major event – the 2014 Confederation of Southern Tagalog Rural Bankers Annual Management Conference this March – will likewise highlight the industry’s role in sustaining the country’s financial growth and to reintroduce consciousness to the banking public that rural banks serve as the engine of economic growth in rural areas.

By making credit available and readily accessible in rural areas at reasonable terms, rural banks give small-scale farmers, fishermen and small and micro entrepreneurs with the means to not only improve their respective lives but also the economic standing of the communities where they belong. It will create a domino effect wherein a single family, through the efforts of a rural bank, can positively influence other families as well. How does that work? Say an OFW beneficiary uses the remittance money sent though a rural bank to put up a small business. As that business grows, the beneficiary-family will then borrow from the rural bank to finance the growth. A bigger entrepreneurial venture will also mean potentially hiring more people and also creating another opportunity for more business partnerships, like supplier of goods, for instance.

This distribution of opportunities, income and wealth will promote comprehensive rural development and raise the quality of life for all, especially the underprivileged.

Again, it is a matter of trust – trusting that the system works and trusting that the different components of that system will do their part. For the rural banking industry, their customers have to trust that rural banks will unwaveringly provide them access to financial services and, more importantly, take care of their hard-earned money with utmost dignity.

The two aforementioned important events give rural banks an opportunity to assure their clients that they will do just that and even beyond.