*Speech delivered for the conference The Philippine Pre-Need Industry: Reforms and Prospects
held on 21 June 2005 at the AIM Conference Center, Makati
THE PHILIPPINE PRE-NEED INDUSTRY: REFORMS AND PROSPECTS
A GOVERNMENT PERSPECTIVE*
By
Fe B. Barin
Chairperson, Securities and Exchange Commission
Introduction
Ladies and gentlemen, good morning! I am here with you today to provide
the government viewpoint on how to resolve the problems faced by the pre-need
industry. At the outset, let me state my reservations whether my presentation
can fully achieve that. But I would like to share your optimism by presenting to
you the government sector’s response to the challenges facing the pre-need
industry.
Overview of the Pre-Need Industry
The pre-need industry in the Philippines has gone a long way since the
first pre-need company offered memorial plans in 1966. At its peak, the industry
had 92 companies. Over time, with some mergers and consolidations and
voluntary and involuntary closures, the number has gone down to the present 48.
Total assets of the industry amounted to P157 billion as of the end of 2004. The
total number of plans sold to-date had reached some 3.7 million.
The pre-need industry offers three types of plans or products. These are
(1) life plans or memorial plans, (2) pension plans, and (3) educational plans,
which can be broken down further into fixed value plans and open-ended or
traditional plans. There are no problems right now with life, pension and fixed
value educational plans as these constitute clear and determinable obligations.
On the other hand, it is with the open-ended educational plans that a few
companies are having financial problems.
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Legislative Response
The first pre-need plan was sold in 1966. Since then and up to now which
spans almost 40 years, there is no denying that the pre-need industry has grown
and developed, answering the Filipinos’ need for security and assurance on
things they deem important: education, retirement, and remembering departed
loved ones. But let me tell you also that despite those four decades, a specific
law to govern the industry has yet to be enacted. Could the absence of that
statute be the reason why it has significantly gained popularity among the
Filipinos? Or the absence of any governing law contributed to the difficulties now
being faced by a few companies?
Actually, the only piece of legislation directly dealing on pre-need plans is
a one-paragraph provision— Section 16 of the Securities Regulation Code which
was enacted in 2000. The paucity of provisions on pre-need plans in the Code
can be explained by the fact that there were then pending bills that seek to
establish a separate regulatory scheme for pre-need plans as well as transfer
their jurisdiction to another government agency. Nevertheless, in the interim,
section 16 of the Code mandated the SEC to prescribe rules and regulations on
the sale of pre-need plans, which were eventually issued in mid-2001.
It can be said then that a welcome outcome of the recent, or even
ongoing, heat on pre-need companies is that the enactment of a law to regulate
the pre-need industry has been put on the front burner. At least eight bills are
now pending in both the House and the Senate, seeking to establish the legal
framework for the pre-need industry.
Gleaning from what were stated on the section on “Declaration of Policy,”
the main objectives of the bills are: to place the operation of pre-need companies
on a sound, efficient and stable basis; to protect the planholders, and to create a
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strong and effective regulator for the industry. We at the SEC which currently
oversees the operations of pre-need companies find the last objective
reassuring. Our more recent experience has seen the questioning or even
defiance by a few companies of our directives when we enforce rules and
regulations governing the operations of pre-need companies. Hopefully, with the
enactment of the pre-need code, the agency tasked to regulate the industry could
act swiftly and decisively, without being stymied by restraining court orders,
opinions of a vociferous few, and other dilatory actions.
We are also pleased to note that almost all of the rules and regulations on
the registration and sale of pre-need plans that the SEC promulgated in 2001 are
found in the House and Senate versions. For example, the minimum paid-in
capital of P100 million for a pre-need issuer was retained. The threshold was
imposed to limit the number of players to only those which have the financial
capability to me their obligations.
The SEC had also issued its own rules and regulations on the
establishment of a trust fund for each type of plan, how the fund should be
invested, the setting up of a liquidity reserve fund, and the management of the
trust fund by a trustee. These are also reflected in the House and Senate bills.
Greater disclosure and transparency provisions of the proposed bills were
drawn from current SEC requirement to pre-need firms to issue to their clients an
Information Brochure that contains all the necessary information about the plan
sold.
The proposed Pre-need Code aims to further protect the planholders’
interest. A Planholders’ Protection Fund is being envisioned to serve like the
Philippine Deposit Insurance Corporation that provides insurance to bank
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deposits. The fund shall be used for the payment of claims against a pre-need
company remaining unpaid by reason of insolvency of such company.
There is also a provision on the qualifications of directors and officers,
some kind of a “fit and proper” rule for those who run pre-need companies.
Another Senate version calls for stronger penalties consisting of fines and/or
imprisonment for specific offenses that cause harm to the interest of the
planholders or the pre-need industry as a whole.
The grounds for suspension or revocation of license were also laid down
as well as proceedings in case of conservatorship or insolvency of a pre-need
company. Indeed, our legislators are treating pre-need plans almost like bank
deposits so that a provision authorizing the regulatory agency to regularly
examine pre-need companies is also included in the bills.
The SEC, as the current regulator of pre-need companies, was invited in
the hearings deliberating on the pre-need code. On the whole, we believe that
the provisions of the bills will strengthen the regulatory framework for pre-need
plans. The legislation part to resolve the issues confronting the pre-need industry
is now being taken care of and the regulatory agency could then proceed in its
rulemaking task to support the broad directions and objectives of the pre-need
code.
Deliverance of the Industry through Laws and Rules?
A combination of thoughtful legislation and careful rulemaking does not
automatically lead to a robust and stable pre-need industry. There is no single
piece of legislation or rule that can send the signal to our people that all the
problems have been fixed, and it is now safer to get back in the market.
Moreover, compliance with laws and rules and regulation does not necessarily
mean good management or good corporate governance.
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I agree with the findings of a global survey of financial institutions
conducted by Pricewaterhouse Coopers that any institution that views corporate
governance as merely a compliance exercise is missing the mark. They found
out that one of the reasons financial institutions are not making the grade is that
they equate effective governance with meeting the demands of legislators and
regulators. They fail to recognize that sound governance is also good for
business. In other words, they tend to look at the promulgation of new laws and
rules and regulations as another compliance exercise. The study goes on to state
that the compliance mentality is limiting these institutions' ability to achieve
strategic advantages through governance.
This is then my challenge to the pre-need industry: Look beyond laws
and rules and regulations; look to the principles upon which sound business is
based. In order to restore their trust, existing and prospective planholders must
see pre-need companies shift from constantly searching for loopholes and an
obsession with the bottom line at any cost. They must see a new respect for
honesty, integrity, transparency, and accountability. Indeed, beyond legal
requirements, boards of directors and managers of pre-need companies should
periodically test where they stand on ethical business practices. They should
ask, for example, "Are we getting by on technicalities, adhering to the letter but
not the spirit of the law? Are we compensating ourselves on the basis of our
contribution, or are we taking advantage of our positions? What would happen
to our reputation if the public gets to know about our actions?”
Those at the helm of pre-need companies will have to make a conscious
decision that ethics and integrity should be at the heart of every business
decision. They will have to decide that the limits of the law are not the only way
to determine what is right and wrong. By making this decision and
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demonstrating their commitment to good governance, they will set a tone that
will filter down through their entire organizations.
SEC Internal Reforms
But before one gets the idea that we at the SEC act only in response to
headline-grabbing problems and tell what market participants ought to do, let me
talk about some initiatives that we have tried to bring to the Commission.
When I joined SEC in September of last year, I was aware that the
Commission already gained a reputation as one of the most sincere in ridding
itself of corruption. I therefore saw an opportunity for the SEC to move to a step
beyond mere intention— to be an organization that has been rid of corruption.
We have updated our computerization system to streamline processes,
promote transparency, lessen human discretion and reduce opportunities for
corruption. September of this year is our target date to put on stream a phase of
the computerization project where reports and documents can be tracked on-line,
providing information how long papers stay in one’s table.
I believe in the positive impact of identifying potential problem areas and
dealing with them before they erupt into full-blown crises. We would like to put
more focus on encouraging good outcomes proactively rather than looking for
violations after the fact. We have sought to launch the Commission on a different
course, an approach that anticipates problems before they develop. An ounce of
prevention is indeed worth a pound of cure. Our computerization efforts will
enable our staff to analyze data and information about the financial health of preneed
companies and other corporations. This will enable us to detect “red flags”
or early warning signals so that problems can be addressed before they arise.
We are also developing a risk based capital adequacy model for pre-need
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companies and other capital market players so to calibrate capital requirements
against their risk exposures.
We continue to have a steady diet of corporate cases and we are still
confronting problems of pre-need companies. I have been and will continue to be
firm on wrongdoers. Supporting free markets requires punishing those that abuse
the system. This therefore means strengthening our monitoring and enforcement
system.
Finally, I would like to share with you my regulatory philosophy. I am very
much aware that we regulate one of the innovative industries in the financial
sector. After all, the pre-need industry is a home-grown phenomenon. As a
regulator of such a creative market, we too must be creative and fast-moving.
We must come up with new approaches for addressing the challenges presented
by our markets. Let me take this opportunity to talk to you about what I believe
we should be taking to respond to the creativity and dynamism of the industry.
First, we must work with industry to be sure that our regulation facilitates
market innovation while it protects investors. We need to work with the industry
to address changes as they evolve, rather than merely responding after they
have happened. By working with industry as it innovates and incorporates new
technology, we can gain the information we need for effective oversight.
Second, we have to constantly review our regulations and discard what
does not work, either because the burden outweighs the benefits or because it
has become outdated and no longer meets our needs and the needs of our
stakeholders. The purpose of regulation is first and foremost to protect investors.
But we do those investors a disservice if our rules shackle industry and prevent
innovation, or lead to incomprehensible results. It is our duty to keep our
regulatory structures as simple, clear, and up-to-date as possible. Our markets
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are changing. But we must take care not to answer every innovation with a new
regulation. As regulators, we should encourage legitimate changes and
improvements, not stifle them.
All of what we would like to do and happen within SEC rest on the
shoulders of the officers and staff. An important agenda therefore is our
capacity-building program for our staff. We cannot expect excellence and
integrity from the companies we supervise and regulate if we ourselves do not
have the professional capability and moral compass to carry out our
responsibilities, from the Commissioners down to the clerks. We ourselves
should be the mirror of fairness, accountability, transparency and consistency in
our regulatory actions. I know that this is not an easy task for a more than 350
strong organization. But we have to do it and since we have shown than we are
most sincere in eradicating corruption in our operations, the next step is to make
that happen.
Conclusion
The eventual legislation of the pre-need code would establish basic
principles and objectives, which in turn, would serve as guides of the regulatory
agency to promulgate the necessary rules and regulations. These activities,
however, should be viewed at most as drawing up the road map under which
pre-need companies operate. What matters more is what routes they take and
how they deliver the security, assurance and peace of mind they promised to the
Filipino people.
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