Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

July 7, 2008

[Opening Remarks by FSA Commissioner Sato]

Please feel free to ask me questions.

[Questions and Answers]

Q.

Last week, the FSA (Financial Services Agency) issued business improvement orders to Nomura Securities and 10 life insurance companies, including Nippon Life Insurance Co. Could you explain again the purpose of the orders and what you would like them to do?

A.

First, regarding the insider trading case involving Nomura Securities, we issued a business improvement order to the company on Thursday, July 3, under Article 51 of the Financial Instruments and Exchange Act, because its system for preventing insider trading using corporate client information was recognized as insufficient in light of the need to establish an internal control system suited to the trends of business diversification and internationalization.

Nomura Securities has been making self-improvement efforts, such as formulating and announcing measures to prevent the recurrence of insider trading and clarifying where the responsibility lies in this case. Meanwhile, as I said just now, it cannot be denied that the company had a problem from the viewpoint of the need to establish proper information management and business operation systems suited to its business diversification and internationalization. In addition, it is desirable for the company to establish a system that will enable it to identify and take the necessary additional measures without any delay once its business has diversified and internationalized further in the future or when the market environment changes - namely, an enhanced level of internal control system that will enable dynamic responses. We issued a business improvement order to the company from this perspective, with a view to protecting the public interest and investors. We will require the company to implement the recurrence prevention measures steadily and effectively and, as I said earlier, to establish an internal control system that will enable it to respond quickly to changes in the market environment. The important thing for the company is to acquire and entrench the capability to respond autonomously and voluntarily to changes in situation or over the course of time.

As for the non-payment of claims by life insurance companies, on Thursday, July 3, we also issued business improvement orders to 10 companies that have been found to have a large number of non-payment cases involving a large sum of unpaid claims, and that need to make further improvements in their systems for business management and operations under Item 1, Article 132 and Item 1, Article 204 of the Insurance Business Act.

We recognized some improvements, as represented by the companies commencing efforts to implement measures to prevent the recurrence of non-payment cases. However, it has been concluded that their business improvement is still insufficient, as the effectiveness of the measures to prevent recurrence has not yet been verified by internal audit divisions or other relevant organizations. Therefore, with a view to protecting policyholders, we have decided to issue business improvement orders to the 10 companies and require them to establish business improvement processes, such as making enhanced efforts to improve their internal control systems and reviews and improving the recurrence prevention measures.

We have recognized some business improvements in the case of both Nomura Securities and the 10 life insurance companies, as represented by their formulation of measures to prevent the recurrence of problems. Of course, we have taken account of these improvements as an attenuating factor when considering what administrative action to take. The purpose of the actions we have taken this time is, partly, to encourage and prompt them to make further improvements in the future. This is based on the basic concept of "better regulation," which is to support self-improvement efforts by financial institutions and to take forward-looking actions. The FSA hopes that the companies will give due consideration to the purpose of our administrative actions, strive to establish an effective and appropriate control system, and make further business improvement efforts, with a view to enhancing convenience for customers and better protecting them.

Q.

I would like to ask you about the appointments of senior FSA officials. The new leadership team of the FSA took office on July 4. What would you like them to do? Also, one notable thing about the appointments is that none of the senior FSA officials have retired. What do you think of this from the viewpoint of the organizational renewal of the administration?

A.

With regard to your first question, the FSA is charged with accomplishing three administrative objectives: namely, stabilizing the financial system, improving the protection of users and user convenience, and establishing a fair and transparent market. Although I believe that these objectives will remain unchanged, I expect that the specific actions we need to take will vary according to the time and situation. With due consideration of these objectives, senior FSA officials, including myself, must work together to conduct financial regulation in ways that satisfy the needs of the times. I would appreciate your continued cooperation.

Over the coming year, we will probably need to tackle new tasks. As for what we must continue to tackle, like I said the other day, there are three tasks in which we have been engaged for the past year as a very broad theme, and they will continue to be important. These three tasks are responding to the subprime mortgage problem, strengthening the competitiveness of Japan's financial and capital markets and improving the quality of financial regulation (better regulation).

Regarding the subprime mortgage problem, I believe that the Japanese financial authorities have taken appropriate actions, including pursuing leading practices in information disclosure. Anyway, we need to continue to take proper action, including seeking cooperation with the authorities of other countries. From a global perspective, there are a number of tasks that remain to be accomplished. In order to accomplish them, we must strive to ensure effective administration by using the FSA's collective intuition (market sense) regarding the global market.

As for the task of strengthening the competitiveness of Japan's financial and capital markets, we have made substantial progress, as shown by the improvement of the institutional framework in the form of the enactment of the Act for the Amendment of the Financial Instruments and Exchange Act in the previous Diet session. We will continue to improve the institutional framework, including revising relevant cabinet orders and ministerial ordinances. However, from now on, we will enter a new phase in which the focus of efforts shift from improving the institutional framework to putting policy measures into practice under the reformed framework, in order to produce specific benefits.

Regarding better regulation, we are moving from a phase in which we seek to enhance awareness and understanding of the purposes, objectives and so forth of the initiative toward better regulation - although we will need to continue such efforts, as this is a time-consuming process - to a phase in which we should seek to have the spirit of better regulation firmly established in both the public and private sectors, and to make use of the benefits gained so far. Recently, the FSA has agreed with the financial industry on 14 principles concerning the financial sector, and the way in which these principles should be utilized will be a very important theme from now on.

Given the mountain of tasks, both domestic and international, including those that we should tackle on a continuous basis, it is important for the FSA to aim to conduct effective, high-quality financial regulation suited to the needs of the times as efficiently as possible, by strengthening its internal bonds through enhanced inter-bureau exchanges and by promoting cooperation among its various bureaus and divisions.

As for your second question, the issue of organizational renewal, the personnel appointments we have made this time are intended to achieve the objectives that I mentioned. Generally speaking, renewal may be an important factor to consider in personnel appointments. However, the appointments this time have been made from a comprehensive perspective, in order to put the right people in the right posts, in light of our administration's objectives.

Q.

Regarding stock prices, the Nikkei average rebounded today for the first time in 13 days. While the Nikkei Average continued to decline for more than 10 days, U.S. stock prices also fell as much as 20% from their peak. The lingering concern about a U.S. financial crisis has been cited as a common cause for the declines of Japanese and U.S. stocks. I understand that debate is ongoing within the U.S. government on the establishment of new legislation to prepare for the possible failure of a major investment bank. What are your views on the current global stock price slump and the concern about a U.S. financial crisis?

A.

First, regarding stock market developments, market prices are determined as a result of investment activities conducted by various market players based on their own judgment, as I always say. So, as a representative of the authorities, I would like to refrain from making any definitive comments on their background or other matters.

As you said, the Japanese stock market, as measured by the Nikkei stock average, declined for 12 straight days through Friday, July 4. I am not in a position to make any definitive comments on this point, either. However, I will cite some factors pointed out by market participants. One factor is the lingering uncertainty over the prospects of the global financial market and global economy due to the rise in the prices of crude oil and commodities and the continuing effects of the subprime mortgage problem, which have led to sluggish trading in the Japanese stock market, although daily losses were mostly modest. Another typical explanation often cited is that there have been moves among foreign investors, who account for 60% of the stock market transactions in Japan, to lock in profits by selling Japanese shares, the prices of which have been relatively firm since this spring compared with shares in other countries, because of their reduced risk tolerance following a stock market drop in their home countries.

In any case, the FSA will keep a close watch on future market developments and the soundness of financial institutions. Furthermore, in addition to taking defensive measures, the government as a whole will strive to establish an attractive market in Japan as a kind of offensive move, since the plan for strengthening the market that I mentioned earlier is proceeding steadily. In the latter part of your question, you asked me about the situation concerning the subprime mortgage problem, including the debate in the United States about establishing a framework for (bailing out) investment banks. I am aware that a senior U.S. government official has made remarks relating to this matter. However, I would like to refrain from directly commenting on it. So-called LCFIs (large and complex financial institutions), which are large in size and operate in the global market, engage in an extremely diverse range of businesses and take a diverse range of risks on a large scale. I suppose that the U.S. authorities are concerned that if any such financial institution is forced to suspend operations, it will create a very difficult situation, with counterparty risk materializing immediately. As I said before, we are seeing both positive and negative developments in the current global market.

The positive developments include the readiness of the large U.S. and European financial institutions that I mentioned just now to quickly recognize and disclose losses related to securitization products on a quarterly or semiannual basis, and raise fresh capital to strengthen their capital bases if they find themselves to be undercapitalized. There are also parties - mainly sovereign wealth funds - that are willing to provide capital in response to these moves to raise capital. That a mechanism like this is working under the private sector's initiative is a positive factor. Moreover, the central banks and supervisory authorities in the United States and Europe have made it clear that they are ready to take resolute actions to prevent a global systemic risk from materializing, and are actually taking such actions. As a result, the likelihood of such a risk materializing has apparently been declining.

On the other hand, one negative factor is the U.S. housing market slump, as confirmed by the declining housing price and the high mortgage delinquency rate. In addition, there remains a lack of liquidity in the market for securitization products, which is one of the most notable features of the ongoing global financial market turmoil. With few transactions being made, the underlying assets not necessarily clear, and confidence in the valuation of securitization products (which is partly confidence in credit ratings) shaken, the conditions for the restoration of liquidity have not been met. Furthermore, because major financial institutions that have recognized huge losses have found themselves to be undercapitalized, the lending stance of banks has become particularly cautious in the United States, and this could affect the real economy in the country. Another negative factor is the fact that concerns about inflation due to the surge in the prices of crude oil, primary goods and commodities are imposing constraints on macroeconomic and monetary policies.

As for Japan's financial system, as I have repeatedly said, the exposure of Japanese banks to subprime mortgage-related products, securitization products in general and their losses, which the FSA has compiled and published, are limited compared with the situations of the LCFIs in Europe and the United States, each of which has posted losses to the tune of 3, 4 or 5 trillion yen. Also, Japanese banks' losses are small enough to be covered by their term profits, securing profits for the banking industry as a whole. In light of these factors, I remain unswayed in my belief that Japan's financial system is unlikely to receive serious damage.

Nevertheless, we should admit that the global financial market turmoil is continuing. The FSA needs to keep a close watch, with an enhanced level of vigilance, on market developments and their possible effects on the soundness of Japanese banks, while maintaining cooperation with other relevant authorities in Japan and overseas.

Q.

On Friday (July 4), the non-life insurance industry released data compiled voluntarily with regard to the overcharging of insurance premiums. What do you think about this report?

A.

I will explain how I view the current situation, rather than expressing my opinion about the report. On Friday, July 4, non-life insurance companies announced their estimated amounts of overcharged fire insurance premiums. The estimated number of cases of overcharging at the 26 companies that released data totaled about 1.53 million, with the total amount of overcharging estimated at about 37.1 billion yen, as I understand it. With regard to the overcharging of fire insurance premiums, non-life insurance companies are conducting voluntary investigations based on methods and plans determined by themselves.

The data announced this time reflects the findings of the investigations that they have conducted so far, and I understand that they will continue any necessary investigations. Although the amount of overcharged premiums per contract was relatively small, the total value of overcharging proved to be fairly large, as there were a huge number of overcharging cases. They need to quickly analyze this state of affairs, identify the cause, and make efforts to prevent similar problems from recurring. Moreover, they must quickly take action to take care of overcharged customers, such as by refunding overcharged premiums.

The FSA believes that it is important, first and foremost, for the companies to conduct voluntary investigations properly, make self-improvement efforts and establish arrangements and procedures to quickly take care of affected customers and prevent the recurrence of similar problems. We will follow up properly on the status of their efforts.

Q.

The responses of both life insurance companies and non-life insurance companies could hardly be described as quick, as they are still dealing with these problems, which came to light more than three and a half years ago. In light of their responses so far, do you think that they have acted quickly? Also, has the FSA really gained the trust of consumers by leaving this issue to be handled according to the voluntary rules of the insurance industry? What do you think of the FSA's response from this perspective?

A.

Their investigations have taken a lot of time primarily because the number of cases concerned is huge. As for this problem (fire insurance premium overcharging), all non-life insurance companies have conducted investigations into past and outstanding contracts, so the number of cases investigated has naturally grown huge. The overcharging of insurance premiums affects all contracts. In contrast, the non-payment of insurance claims affects only contracts for which a cause for payment, namely an insurance incident, has arisen, so their number is limited. Compared with this, the number of cases investigated is huge, as all contracts are affected. Another factor that has prolonged the investigations is the fact that non-life insurance contracts are concluded via agents as standard business practice, which has made it necessary to conduct investigations through a number of agents.

For the past three or four years, the FSA has tackled a series of problems in the life and non-life insurance industries, including improper payment or non-payment (of insurance claims) and the overcharging of insurance premiums. As it closely investigated the facts confirmed through its inspection, the FSA detected some new facts. In some cases, it conducted fact-finding investigations in response to a variety of input from insurance policyholders and customers. I am confident that the FSA has responded to the various cases in ways that allocate its administrative resources most efficiently, while taking account of the importance, maliciousness and other factors of incidents based on the facts it has grasped as precisely as possible, and considering the priority of matters to be tackled. In this context, the most malicious case involved refusals to pay claims despite the occurrence of insurance incidents, on the basis of various dubious excuses, and our first action was to deal with such cases in a most rigorous manner. Next, we moved on to cases where the payment of claims was neglected. Although these cases may not involve much element of intentional refusal to pay, I suppose they occurred because business execution systems were insufficient from the viewpoint of serving customers first, thus resulting in problems such as clerical lapses or inappropriate procedures. We have dealt with cases of payment failure like these.

As we have taken actions regarding these cases, the business execution systems of insurance companies have gradually been becoming customer-oriented, with their focus shifting to improving service for policyholders and fulfilling contract terms. I recognize substantial improvements in the mindsets of managers and the company-wide execution of business, including the usage of manuals. However, the most important thing is that each insurance company maintains an appropriate level of service for policyholders and engages in business in ways that secure customers' trust. The FSA will continue to supervise the insurance industry from such a perspective.

Q.

There is apparently growing debate on the management of public pension assets. The GPIF (Government Pension Investment Fund) suffered annual investment losses, according to its asset management performance data for fiscal 2007, which was announced late last week. Before the announcement, a study group of the LDP (Liberal Democratic Party) proposed the establishment of an SWF (Sovereign Wealth Fund), using public pension assets. As for the FSA, the Financial Markets Strategy Team, an advisory group of Minister (for Financial Services) Watanabe, made references to how the GPIF should be operated and how public pension assets should be managed and invested. Could you tell me again about whether public pension assets should continue to be managed in the present manner, and what you think about the improvement of asset management?

A.

I am aware that debate has recently been under way regarding issues such as the establishment of a Japanese SWF and improvement of the management of public pension reserves. However, the FSA does not have jurisdiction over the management of pubic assets, as you know, so I would like to refrain from directly commenting on that or on other related matters such as the proposed establishment of an SWF.

If I am to speak in general terms, I think that the interests of the people as a whole would benefit from efforts by the government and public sector organizations to maximize the efficiency of the management of the assets of which they are in charge, in light of the purpose and use of those assets, in order to achieve higher performance.

Q.

I would like to ask you again about Nomura Securities and the 10 life insurance companies. Having reflected upon their inappropriate incidents, Nomura and the life insurance companies have come up with measures to prevent the recurrence of similar problems. I think that they have taken such steps with an eye on the possibility of action by the FSA, as well as from the viewpoint of protecting policyholders and users. I imagine that they have been somewhat disappointed at the FSA's decision to issue business improvement orders in spite of their voluntary steps, although you say that the FSA's actions are "forward-looking" ones. What do you think?

A.

As I said earlier, I would like to ask the companies that have received business improvement orders to understand the purpose of the FSA, which is to support self-improvement efforts by individual companies and set the future direction for them to shift to better management.

When we agreed with the financial industry on 14 principles, we stipulated in the guideline of the Supervisory Bureau that voluntary improvement efforts made in accordance with the purpose of those principles should be taken into account as an attenuating factor when a business improvement order is under consideration. As I said earlier, in the cases of Nomura Securities and the 10 life insurance companies, we also carefully considered what kind of business improvement order should be issued in light of such matters. As you can see, we neither ordered a business suspension nor sought a clarification of responsibilities. I hope that the companies will understand our stance, while recognizing voluntary efforts, of urging them to have their improvements established firmly and enhance their services further. In addition, as I said in reference to Nomura Securities, we hope that they will acquire and maintain the ability to respond flexibly and quickly when changes in the business environment occur, when their businesses become much more diversified and internationalized, or when new incidents occur. We would like the companies to consider and understand the contents and purpose of our business improvement orders.

Q.

Regarding the overcharging of insurance premiums, you said that there was a huge number of cases of overcharging and that the total value was also fairly large. Will these cases also be subject to some kind of administrative action?

A.

As I said earlier, individual insurance companies are making voluntary efforts with regard to these cases, so the FSA believes that it is important, first and foremost, to follow up on their efforts carefully. As for future administrative actions, we will not make any comment out of principle.

(End)