March 15th, 2023
House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) was elected today by the House Committee on Economic Affairs to chair the technical working group on Collective Investment Schemes, under Salceda’s proposed House Bill No. 642. Salceda says that the proposal will make it easier and cheaper for working Filipinos to invest in legitimate securities.
A collective investment scheme is an “arrangement where funds are pooled for the purpose of investing in securities and other investments.”
Salceda points out that under current laws, which do not expressly provide for collective investment schemes, investors need to shell out significant amounts of cash in order to make investments in “clunky” assets such as real estate or businesses.
Salceda also points out that entering into an investment itself is “tricky” for ordinary Filipinos.
“Only around 27% of households have any savings at all, and many of them are excluded from investing. If you are an OFW and you never had a TIN, you won’t be able to get one while abroad because you can only get a TIN onsite. That is potentially USD 58 billion that is not being fully tapped in the formal markets – and that is why OFWs are susceptible to scams. We are trying to solve that with the Ease of Paying Taxes Act,” Salceda said.
“But the other problem is that our assets tend to be “clunky,” In finance, we call this asset divisibility. The idea is that assets can be divided into infinitesimally small units so that the smallest retail investor can participate in investing an asset. Because we do not have a legislated CIS framework, most of our assets cannot be divided among smaller investors.”
“In short, if you are a retail investor, it’s expensive to get started. Furthermore, retail investors tend to invest individually, and therefore speculatively. Individually, it is also expensive to get a personal fund manager who can make more intelligent decisions for the average investor.”
Framework for CIS needed
Salceda pointed this entry barrier as the rationale for a framework for investing collectively.
“This is why we need a stronger, broader market for collective investment schemes. Collective investment schemes reduce the fixed costs of fund management and administration.”
“There is already a working model in the REIT law, which is basically a collective investment scheme, except the supply of investment products comes first. This proposal simply defines a CIS as an arrangement where funds are pooled for the purpose of investing in securities and other investments.”
“But we need to set ground rules. First, the duties and responsibilities of the fund manager needs to be outlined, and this bill tries to do that. The agreement to manage funds has to follow certain parameters. The decision-making for the fund, as well as custodianship arrangements need to be set.”
Salceda also wants attractive tax perks for such schemes.
“As with the PIFITA, we also propose to apply the tax treatment for shares not listed in the exchange for shares of participation for the CIS. We also propose to provide the same tax incentives we give to REITs, since the characteristics are analogous.”
VULs, UITFs have “voluntary option”
Salceda also said that he “will relent on [his] insistence that VULs and UITFs are CIS,” but the TWG will give banks and insurance companies the option to offer CIS products.
“To address the violent opposition of the Insurance Commission, I will relent on the insistence that VULs are CIS. But they should not stop insurance companies from offering CIS.”
“The TWG will try to address this with the appropriate language.”
Salceda also wants better tax perks for HMOs to improve takeup by working Filipinos.
“The most critical matter to be settled on CIS is whether a health maintenance organization is a CIS. This was the most glaring debate the last time we took up CIS. I take the opinion that an HMO is not a CIS because its primary purpose is healthcare provision, not investment returns. I would request the Securities and Exchange Commission for its opinion on how the HMOs will be governed, and whether we should include provisions on HMOs in this measure, but I do not believe they should be classified as CIS. Although I do think certain tax privileges should be extended to HMOs, if only to make up for the deficiencies of our own public health care system.”