Philippines Enhances “Fit and Proper” Requirements

Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, has proposed significant reforms to its corporate governance guidelines that would enhance the “fit and proper” requirements for directors and officers of the financial institutions it supervises (BSFIs).

The new rules would shift the assessment of directors and officers from a one-time check at appointment to a continuous evaluation, in recognition of “the pivotal role of the board of directors in safeguarding the safety and soundness of the BSFI.” Under the proposal, firms would be required to conduct an internal fitness and propriety assessment of each director and officer in a position subject to BSP confirmation at least annually. This is to ascertain that “at all times, they consistently possess the requisite integrity, competence, and diligence necessary to discharge their fiduciary duties and oversight responsibilities, individually and collectively.”

The reforms will place a greater burden on institutions to actively monitor their leadership. This will include requirements to notify the BSP within five banking days of becoming aware of “any information that may materially compromise the fitness and propriety of directors and officers.” This notification must include the BSFI’s own assessment of whether the information could impair the individual’s ability to perform their duties.

In a signal that regulators are placing greater emphasis on governance in the face of emerging risks, the BSP is proposing specific requirements for BSFIs to ensure their boards collectively possess the necessary competencies for effective oversight of technology and cyber-related risks. To support this, the BSP is also mandating more robust and targeted training.

The proposal also strengthens the BSP’s ability to intervene directly in the governance of BSFIs. The central bank is seeking the authority to “require the reconstitution or modification of the composition of the board of directors” and its committees in some situations, including if a BSFI is assigned a composite Supervisory Assessment Framework (SAFr) rating below “3,” a signal of supervisory concern. Accountability is further reinforced through tighter confirmation processes, requiring confirmation from the BSP before certain newly elected or appointed directors and officers can assume office. To prevent potential governance gaps, an exception is provided for sudden vacancies that would leave a board without a quorum.