While Americans are in a bitter public outcry over the use or misuse of the bailout funds for corporate world’s fallen giant American Insurance Group (AIG), Filipinos are also dealing with a local version that involves fraud of hard-earned funds. Legacy Group’s reach and impact may not be as global as AIG, but its story is equally riveting.
The similarities are classic. First, both involve billions worth of public funds.
For AIG, a whopping $173 billion of US taxpayers’ money has been infused to keep the bankrupt firm afloat. It was considered too big to fail.
Legacy Group, on the other hand, has reportedly duped depositors, pre-need plan holders, and investors to the tune of about P30 billion.
Both are also loathed. AIG is under fire for financially rewarding about 70 executives involved in a London-based unit that engaged in complex financial products--which turned out to be too toxic--they brought down an entire century-old global financial empire.
On the other hand, Celso de los Angeles, the businessman-turned-politician who owns the Legacy Group became the recent whipping boy for a potentially criminal and complex scheme that involved siphoning public funds from rural banks, pre-need, and investment firms. These funds apparently funded a wine-women-song lifestyle and reportedly paid protectors in power who would shield the businesses from prying eyes.
However, their differences are stark.
At the Insurance Congress of Developing Countries (ICDC) conference held March 25 to 27 in Manila, one question posed by an attendee illustrated the disparity between the failures of Legacy and AIG. It focused on regulations.
“There was lack of regulation over the AIG unit that engaged in CDS (collateral debt swaps). Its business and products are not regulated, which explains the cause of the failure. On the other hand, Legacy’s pre-need business and products are regulated. Why then did it fail?”
Pedro Benedicto, Jr., president of a local insurance firm and a business professor, posed this question because he had a first-hand experience of completing the amortization payments for an educational pre-need plan to cover the tuition expenses of his kids. He did not enjoy the benefits of his investments since the pre-need firm closed.
He raised the issue of regulation over pre-need firms by the Securities and Exchange Commission (SEC). SEC Chair Fe Barin was one of the speakers in the conference.
Benedicto added, “In a way, Legacy has become the Philippine version of AIG.”
Barin explained how the SEC is responding to the woes of Legacy’s pre-need clients through help desks, procedures for filing claims, and other details involving contracts for matured and availing plans.
Benedicto pushed a bit more. “What are you doing to help those who are silently suffering? I heard 50 percent of pre-need firms have already closed?”
Barin said that, at one time, there were about 92 pre-need firms operating. The players have since dwindled. Only 24 are actively operating, while there are 31 firms that just exist to honor the obligations to clients but are not selling new plans anymore.
Was it then SEC’s failure as a regulator that led to collapse of half of the industry players?
“Let me put this in context,” Barin said, noting that it was during her watch when the troubles of high-profile, pre-need firms started to hug the headlines.
She stressed that she assumed the SEC post only in September 2004. “The first failure occurred four months after I came in to the SEC. They were just waiting to explode. They exploded after I assumed.”
She also highlighted how the SEC was given the responsibility of regulating the pre-need industry but was not provided the human and technical resources to do the job.
“We have 400 staff in SEC. But only 26 are in the unit that oversees the pre-need industry. Even if there are only 24 firms operating and 31 firms servicing now, we don’t have enough manpower to go after each firm,” Barin said.
She said the pre-need unit’s work has been mostly based on offsite audits, which involves checking whether the firms are complying with established rules and regulations.
“This should not be an excuse, but that is the explanation,” Barin said.
The gravity of the pre-need firm industry’s financial concerns first became obvious to the SEC during the time of former SEC chair Lilia Bautista.
In a previous interview with Newsbreak, Bautista said the financial problems of College Assurance Plan (CAP), then the market leader in the sales of educational pre-need plans, was already emerging after a thorough review by actuarial consultants of the financial viability of the firm’s products.
CAP, as other pre-need firms then, offered open-ended plans. These are contracts that basically promised to cover all of the beneficiary’s tuition costs. However, the difference between how much the plan holders paid for and the actual tuition costs widened vastly after the government lifted the cap on tuition fee increases. Tuition fees were growing by leaps and bounds, but the funds the pre-need firms set aside were not growing as much.
The actuaries said that CAP and several pre-need firms should infuse more fresh funds to cover the gap. CAP and the others vigorously fought this recommendation.
By the time Barin took over from Bautista, CAP was hemorrhaging financially. The computations of the actuaries became real as hundreds of thousands of CAP educational pre-need plan beneficiaries suddenly found themselves out of school since CAP was cash-strapped to settle their bills with the schools. That was in 2005.
That same year, other pre-need firms also stopped paying their obligations. The likes of Pacific Plans, Platinum Plans, Professional Group and others trailed CAP’s fate.
Almost two million pre-need plan holders silently suffered. Others went to the politicians, media, and other venue to share their sob stories.
From CAP to Legacy
Former SEC chair Bautista previously told Newsbreak that before the 2005 pre-need brouhaha exploded, the commission was in a difficult balancing act of forcing the companies to financially shape up and pushing them too far that the firms might end up falling off the edge. She said she was concerned that if the latter would be the result of their decisions, more investors would end up with less.
In the end, she said the best she could do was to have the Revised Securities Act passed. It contained one provision (Section 16) that essentially left the job of regulating the pre-need industry with the SEC. She said it was supposed to be an interim arrangement since the lawmakers still couldn’t make up their mind whether to keep pre-need under SEC or toss it to the Insurance Commission (IC).
Bautista recognized way back then that regulating the pre-need industry needed more technical and manpower resources. Fast forward to 2009, Barin is still echoing the same concerns. Eventually, Legacy became the latest in the growing list of failed pre-need firms under the tutelage of SEC.
The legislators have been mulling over the fate and consequences of the pre-need industry for almost a decade now. Some politicians have also used live broadcast of their hearings on CAP, Pacific Plans, and now Legacy to enhance their media mileage.
Six years since investigations in the Senate and the lower House on the pre-need industry started in the 11th Congress, the sob stories and quality of the culprits have been more or less the same. What changed were only the names of the firms, the personalities, and the amounts involved.
For example, CAP focused on the founder’s son, Robert John Sobrepeña, whose other businesses—Camp John Hay in Baguio City, Metro Rail Transit project, and various high-end golf and residential projects—were able to source financing by tapping the funds set aside to pay obligations to educational pre-need plan holders.
In the case of Legacy, witnesses in the Senate hearings showed documents that the some of the funds meant to cover obligations to pre-need clients were able to make their way to the yachts, lavish birthday parties, high-end real estate properties, and fancy cars of owner Celso de los Angeles.
Investment or insurance
Whether the pre-need industry should be regulated by the SEC or the IC is almost a broken record-like issue.
The Federation of Pre-need Firms has strongly lobbied to keep the industry under SEC. It has prevailed. In 2008, the bills approved on third reading by the Senate and the lower House assigned the regulation over the pre-need firms to the SEC.
In other words, pre-need products are still considered investments, thus, under SEC. Financial products considered investments are regulated based on the concept of full disclosure. The SEC, with its limited manpower, acts based on the information the firms volunteer.
Barin described the ‘full disclosure’ regulatory template: “Investment protection doesn’t mean we will hold the hand of investors and tell them where to go. It means [the firms] disclose all info about the securities, so the investors would know the risks involved and intelligently use these info for choosing their investments.” She added that, on their own, investors can get the information from the firm that is selling the product, the regulator, or other sources.
This approach for pre-need products has been criticized over and over. Investors in pre-need firms are not usually the sophisticated bunch. They are housewives, small business owners, simple traders, low- to high-level employees. A good number of them are overseas Filipino workers. Some even stopped working abroad as soon as they finished the amortization payments for their pre-need plans.
On the other hand, insurance products are more strictly regulated by the Insurance Commission (IC).
If pre-need plans are considered insurance products, and thus regulated by the IC, they would not be allowed to just set aside 45 to 51 percent of the clients’ total amortization payments to cover future obligations, explained former Insurance Commissioner and SEC pre-need consultant Evangeline Escobillo.
Insurance firms, Escobillo added, set aside almost all of the amounts entrusted to the firms by clients. She stressed that this is so unlike the case among pre-need firms, which basically just act as middlemen between the clients and trustee banks. Pre-need firms raise funds from the public, then turn around and assign a portion (45 to 51 percent) of those collected funds to the trustee banks. It is the trustee banks that would then have to invest and grow the funds to eventually cover the future obligation of the pre-need firms to clients.
Apparently, the pre-need firms have made unrealistic investment rate assumptions. In 2008 alone, the Federation of Pre-Need Firms said they assumed that the investments could grow between 6 to 12 percent. In reality, the funds only grew by a meager 2 to 3 percent.
The Federation has since hinted that some of their member firms may not be able to pay the full sum of what they owe clients. The potential amount that could go unpaid in the future was worth about P48 billion as of June 2008.
In the case of the three Legacy pre-need firms, the aggregate trust funds amount only to over P500 million. This is a far cry from the estimated P7 billion obligations to about 20,000 Legacy clients.
The sorry fate of the pre-need industry, Escobillo said, is the fault of the politicians who have taken too long a time to transfer regulation to the proper body, which is the IC. She also faulted the SEC for its lax regulatory oversight, and the Federation of Pre-Need Firms for their lobbying.
“Too many Filipinos have already suffered,” she concluded.