Launch of the Financial Stability Coordination Board’s First Half 2021 Financial Stability Report on July 28, 2021. (PHOTO CREDIT: FINANCIAL STABILITY COORDINATION BOARD – TECHNICAL SECRETARIAT, BANGKO SENTRAL NG PILIPINAS
ON February 21, 2022, Insurance Commissioner Dennis Funa issued Circular Letter No. 2022-08 on “Guidelines on the Implementation of Republic Act No. 11523 or the Strategic Institutional Transfer Act (FIST)”.
“The IC has issued Circular Letter No. 2022-08 as part of a ‘whole-of-government approach’ to the negative economic effects of the Covid-19 pandemic. There is a need to issue such guidance as insurance companies have been identified under the FIST Act and its Implementing Rules and Regulations (IRR) as one of the credit granting institutions that can invest in and transfer to Financial Institutions Strategic Transfer Companies (FISTC) non-performing assets,” Commissioner Funa said.
“Furthermore, the same circular letter was issued in recognition that it is essential that our regulated insurance companies can maintain their financial health in order to cushion the negative economic impact of the pandemic,” he said. he adds.
Meeting with the Chartered Financial Analyst Society Philippines on January 30, 2020
Transfer of APMs
Under the FIST Act, insurance companies can transfer their NPAs to FISTCs. These APMs should have become non-performing no later than December 31, 2022.
NPAs include Non-Performing Loans (NPLs) which include receivables and restructured loans whose principal and/or interest have remained unpaid for at least 90 days after they have become past due or after any event of default under of the loan agreement.
Insurance companies may also transfer to FISTC real estate and other property acquired (ROPA) in settlement of loans and receivables, including shares and personal property acquired as payment or judicial or extrajudicial foreclosure or execution a judgment or the execution of a security interest. .
An insurance company that intends to transfer NPAs to an FISTC must file an application for eligibility of said assets with the IC. Thereafter, if the application is found to be in good standing, the IC issues a Certificate of Eligibility (COE), certifying that the NPAs subject to the application are indeed non-performing for the purposes of benefiting from tax exemptions and privileges in accordance with the provisions of the FIST law and its IRR.
Sales or transfers of NPAs to a FISTC must be of the nature of an actual sale, in which the ceding insurance company transfers full legal and beneficial title and relinquishes effective control over the transferred NPAs, and that the NPAs are legally isolated and placed beyond the reach of the ceding insurance company and its creditors.
Investments in FISTCs
Notably, under Circular Letter No. 2022-08, life insurance companies are now permitted to invest in shares and instruments of investment units or “IUI” of FISTC up to ten percent of their latest verified total admitted assets.
Similarly, non-life insurance companies are permitted to invest in shares or IUIs of FISTC up to 20% of its net worth based on its latest approved annual statements.
Under the FIST Act and its IRR, a FISTC can issue IUIs to any qualified buyer, including insurance companies, for a minimum amount of P10 million, according to a plan submitted to the Securities and Exchange Commission (SEC) and issued with a certificate of License to sell or offer for sale securities.
Nor shall selling insurance companies, its parent, subsidiaries, affiliates, or shareholders, directors, officers, or any related interest, acquire or hold, directly or indirectly, any IUIs of FISTC that has acquired its postcodes.
Tax incentives and exemptions
Under the FIST Act and its IRR, there are various tax incentives and privileges for the transfer of NPAs to a FISTC. These are: (1) Exemption from capital gains tax; (2) Exemption from documentary stamp duty; (3) Exemption from withholding tax chargeable on transfers of ordinary assets; (4) Exemption from VAT; and (5) Applicable fees reduced by 50% of: (a) Registration and transfer fees on the transfer of an immovable mortgage and security to and from FISTC; (b) Filing fees for foreclosure proceedings; and (c) land registration fees.
All sales or transfers of NPA to a FISTC will be entitled to the above privileges for two (2) years from the effective date of the FIST Act.
In the case of acquisitions of NPLs by a FISTC, the FISTC is eligible for exemption from income tax on net interest income, mortgage registration fees and documentary stamp duty.