BSP Amends Guidelines on Digital Banks

On September 14, 2022, the Bangko Sentral ng Pilipinas (the Philippine Central Bank or “BSP”) issued Circular No. 1154 (the “New Circular”) to amend the guidelines on digital banks previously set out in Circular No. 1105 dated December 2, 2020 and Monetary Board Resolution No. 1536 dated November 26, 2020.  Circular 1154 took effect on October 8, 2022, and clarifies the extent to which prudential banking requirements apply to digital banks, and amends the documentary and licensing requirements on the establishment of digital banks. 

Digital Banks

Previously, in issuing Circular 1105, the BSP recognized digital banks as a distinct category of banks and sought to establish an enabling regulatory environment that (a) allows responsible innovation to flourish; (b) promotes cyber resilience; (c) and contributes to advancing the digitalization of the financial industry.

As defined under Section 102 of the Manual of Regulations for Banks (“MORB”), a “digital bank” offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch/sub-branch or branch-lite unit offering financial products and services.  The New Circular amends Section 102 of the MORB and clarifies that only a bank that is granted a digital bank license is allowed to market itself as a digital bank.  Nonetheless, any bank may market itself as a bank offering “digital banking products or services” (or use equivalent terms) if it has secured the requisite BSP license on electronic payment and financial services for those digital banking products or services. 

The required minimum capitalization of digital banks, which must be complied with at all times, is still set at PhP1.0 billion.  The New Circular also clarifies that digital banks are subject to the same standards on corporate governance, risk management, compliance, internal control and audit, and reporting governance, among others, that are applicable to other bank categories. Additionally, a digital bank is subject to all prudential requirements set out by the BSP, including, but not limited to, corporate governance, risk management, particularly on information technology and cyber security, outsourcing, consumer protection and anti-money laundering, and countering terrorist and proliferation financing as provided under existing regulations.

Conversion to a Digital Bank

Under Circular 1105, banks converting to digital banks are given a period of three years from approval of such conversion by the Monetary Board within which to meet the minimum capital requirement and implement any necessary transition plan, which may include divestment or closure of branches, sub-branches, or branch-lite units.  Upon receipt of the notice of the Monetary Board’s approval of its application, the bank will no longer be allowed to engage or renew transactions under authorities not associated with those allowed for a digital bank. Within six months from such the date of its receipt of a notice, the converting bank must phase-out all inherent powers and activities under special authorities not normally associated with a digital bank and submit its amended articles of incorporation and by-laws to the Securities and Exchange Commission (“SEC”).

Notably, the New Circular clarifies that the foregoing transitory provisions (particularly, the three-year capital build up) does not apply to committed capital infusion of new investors arising from the acquisition, purchase/sale, transfer of the converting bank’s shares of stock or similar arrangements.  Nonetheless, the minimum required capital must be infused before the BSP issues a Certificate of Authority to Register with the SEC in favor of the converting bank.

It also appears from a footnote to the New Circular that the moratorium on applications for new digital bank licenses (including applications for conversion of an existing bank’s license to a digital bank license) remains effective.  The moratorium also covers applications for the establishment of other types of banks that will primarily offer financial products and services that are processed end-to-end through a digital platform and/or electronic channel.

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