FSA Newsletter March 2006
Yoshitaka Sakurada (Senior Vice Minister for Economic & Fiscal Policy and Financial Services) making an address at the meeting of Directors of Local Financial Bureaus (January 25)   Kaoru Yosano (Minister of State for Economic & Fiscal Policy and Financial Services) making an address at the Informal Round Table on Operations of Stock Exchange (February 6)
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Launch of Informal Round Table on Operations of Stock Exchanges


As the securities market is crucial infrastructure for economic activities, stock exchanges (i.e., market operators) are required to ensure smooth and stable operations of the market. As problems have been arising since last year, including a series of system failures, efforts are being made to restore confidence primarily by related institutions including stock exchanges.
In order to support such efforts, the Informal Round Table on Operations of Stock Exchanges (the Financial Services Minister's private consulting group headed by Yutaka Narita, Principal Advisor of Dentsu Inc.) held its first and second meetings on Monday February 6, 2006 and Friday February 17, 2006, respectively, to conduct studies and give advice from the viewpoint of experts with a global perspective.

At the second meeting, members agreed that it would be important for the Round Table to issue public messages promptly with respect to pressing matters such as system improvements and therefore, published a report titled ''Summary of 1st Preliminary draft discussion paper on issues on building better operation systems of Stock Exchanges'' on Thursday February 23.

In the months ahead, the Round Table will discuss a wide range of subjects--not only how systems should be improved but also what form stock exchanges should take--and will announce its opinions to the public whenever the preferred policy directions have been determined.
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Framework (Terms of Reference) of the High-Level Dialogue between the Financial Services Agency and the U.S. Securities and Exchange Commission

 
  1. Amid the increase of cross-border financial transactions, the Financial Services Agency of Japan (FSA) acknowledges that it is extremely important to build a cooperative relationship with the Securities and Exchange Commission of the United States (SEC), which oversees the world's largest securities market. From this point of view, the FSA has been making efforts to maintain a good relationship with the SEC in the past.
     
  2. The FSA and the SEC decided to have a regular high-level bilateral dialogue on securities markets (''Dialogue'') in May 2005, then the first Dialogue was held in Tokyo in June 2005.
     
  3. On January 27, the FSA and the SEC established and agreed on the framework (''Terms of Reference'') which sets forth the objectives, timing, venue, participants and agenda of the Dialogue, with the aim of regularizing the Dialogue.
     
  4. In accordance with the Terms of Reference, the FSA and the SEC will have regular meetings between senior staff and high-level officials of the FSA and the SEC counterparts, to exchange views on issues of common interest pertaining to the securities markets in both countries and to promote cooperation in addressing such issues. Discussion items for 2006 are expected to include: accounting and auditing standards; corporate governance and internal controls; approaches to securities companies, self-regulated entities, etc.; cross-border cooperation and information sharing on enforcement matters; and approaches to facilitating technological progress in securities markets.
*     For more information, please refer to ''The framework (Terms of Reference) of the High-Level Dialogue between Financial Services Agency and the US Securities and Exchange Commission'' (January 30, 2006)'' in the ''Press Releases'' section of FSA's website.
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EU-Japan High Level Meeting on Financial Issues

 
  1. On 18 January 2006, the EU-Japan High Level Meeting on Financial Issues was held at the headquarters of the European Commission in Brussels, the capital of Belgium. The meeting is a regular international conference, which has been held once a year since 1985, in order for senior administrative officials of the fiscal and monetary authorities of Japan and the European Union (EU)--namely, the Japanese Ministry of Finance (MOF) and the Financial Services Agency (FSA) and the Directorate General for Economic and Financial Affairs (DG ECFIN) and the Directorate General for Internal Market and Services (DG MARKT) of the European Commission--to exchange opinions on the macroeconomic climate and major issues relating to the respective financial sectors in Japan and the EU. This meeting was attended by Mr. Hiroshi Watanabe, Vice-Minister of Finance for International Affairs, MOF, Mr. Toru Shikibu, Deputy Commissioner for International Affairs, FSA and their related staff, and by Mr. Klaus Regling, Director General of DG ECFIN, Mr. Alexander Schaub, Director General of DG MARKT and their related staff.
     
  2. In this meeting, the morning session started with discussions between MOF and DG ECFIN on the macroeconomic climate and fiscal and monetary policies in Japan and the EU. This was followed by a joint session with the participation of MOF, FSA, DG ECFIN and DG MARKT which involved discussions on the influence of China's economic performance on the Japanese and EU economies, the stability of the Chinese financial sector, and EU's assessment on the equivalence of the Japanese accounting standard with the International Accounting Standard (IAS). In the afternoon session, FSA and DG MARKT exchanged opinions on the developments in Japan and EU's financial sectors in recent years. The Meeting was productive in that opinions were actively exchanged throughout the day between MOF, FSA and the European Commission. The following is a summary of discussions on FSA-related matters.
     
  3. With respect to the assessment on equivalence between accounting standards, in January 2005, as part of measures to consolidate the EU capital markets, the European Commission introduced a new rule that obliges local companies whose securities are listed on stock exchanges within the EU region to disclose IAS-compliant financial statements. Furthermore, the European Commission is going to apply the rule that obliges non-EU companies listed on the stock exchanges within EU region to disclose financial statements which comply with IAS or other accounting standards equivalent to IAS. Accordingly, with the aim of applying such obligations to foreign companies from January 2007 onwards, the European Commission has been assessing Japanese, American and Canadian accounting standards as to whether they are equivalent to IAS, and has been working toward reaching its conclusion. If in the end the European Commission concludes that the Japanese accounting standard is not equivalent to IAS, Japanese companies, which are currently listed on stock exchanges within EU region, will not be allowed to disclose information to EU investors by publishing financial statements based on the Japanese accounting standard; they will have to disclose information based on IAS or other accounting standards equivalent to IAS, which will be a significant burden on them.
    In this context, the FSA has stressed that Japanese accounting standard should be deemed equivalent to IAS because the Japanese accounting standard is already consistent with IAS and has excellent quality through the experience of ''the Accounting Big Bang'' in the late 1990s. In this meeting, Mr. Watanabe stated his concern that EU's uncertain direction to the conclusion of the assessment is increasing uncertainty of future funding of Japanese companies in the EU capital market.
    In response, the European Commission underlined the importance of ensuring effective equivalence between accounting standards through their convergence, and expressed its view that this problem could surely be resolved in the future by maintaining a close relationship between Japan and EU.
    Both Japan and EU share a consensus that it was important that the Accounting Standard Board of Japan (ASBJ), which established the Japanese accounting standard, and the International Accounting Standard Board (IASB), which established IAS, have to make progress on collaborative activities towards convergence of the Japanese accounting standard and IAS, including their ongoing joint project.
     
  4. With respect to developments of the Japanese financial sector, the FSA explained that the non-performing loans problem of major banks--which had been a crucial issue--was resolved and international confidence in the Japanese financial system has been restored and introduced various measures for responding to the diversification of financial services and consumer needs and the recent further globalization of the financial sector, according to the Program for Further Financial Reform. The European Commission praised the rapid progress of Japanese financial system reform. As the European Commission showed its interest in how the review of the bank agent system would have an influence on the business of foreign financial institutions operating in Japan, the FSA explained the merits of the reform for both consumers and financial institutions.
    The FSA also introduced the basic concept of the draft of the Investment Services Law (provisional name) and the efforts for its legislation. Based on its experience of efforts to consolidate the EU financial markets, the European Commission asked questions about reflecting the opinions of market players in the legislative process. In response, the FSA explained that it had been working towards its legislation by taking account of the opinions of market players in foreign countries, including the EU, as well as those in Japan. The European Commission praised the FSA's efforts to create a new legal framework, which regulates various types of businesses and services in the Japanese financial sector in a cross-sectoral, comprehensive manner, because of being consistent with the trend of financial liberalization and globalization.
     
  5. On the other hand, in regards to development in the EU financial sector, the European Commission introduced the White Paper on Financial Services Policy, which was announced at the end of last year as a comprehensive plan for consolidation of financial markets within the EU region in the next five years, and the priority issues to be tackled in the future based on this plan. The European Commission announced the White Paper--a plan to further consolidate the financial markets within the EU region --following the previous comprehensive policy program, the Financial Services Action Plan (FSAP). The FSA and the European Commission actively discussed the influence of the Clearing and Settlement Services Directive, which aims at unifying the clearing and settlement systems within EU borders, upon financial markets outside the EU region, in light of the provision of the White Paper, which requires the European Commission to take account of the influence of various future measures upon third countries.
    Moreover, the European Commission presented the Markets in Financial Instruments Directive (MiFID), which is aimed at consolidating the EU capital markets (such as entry restriction on investment service businesses (the passport system), investor protection rules, promotion of competition among market participants) and future activity to execute MiFID. The FSA and the European Commission exchanged opinions on the obligations imposed on investment service providers by comparing the Japanese system with the EU system.
     
  6. After the meeting, the joint press release, outlining the meeting, was published.
    The next EU-Japan High Level Meeting on Financial Issues is scheduled to take place in Tokyo. (The date is yet to be decided.)
*     For more information, please refer to ''EU-Japan High Level Meeting on Financial Issues'' (January 19, 2006) in the ''Press Release'' of FSA website.
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Amendment to the Information Sharing Arrangement with the US Securities and Exchange Commission and the US Commodity Futures Trading Commission

 
  1. As an increasing number of financial transactions are taking place across national borders, including those involving securities and financial derivatives, there is a growing need for overseas regulatory authorities to have the ability to share information smoothly with each other in order to oversee and supervise markets properly.
     
  2. For this purpose, the Financial Services Agency (FSA) has already established an information exchange arrangement with the United States, Australia, Hong Kong, etc. (so-called ''Japan-U.S. Memorandum of Understanding on information-exchange concerning Securities sector''). However, the existing arrangement covers securities derivatives but not financial derivatives.
     
  3. On the other hand, the Commodity Futures Trading Commission of the United States (CFTC), which oversees financial derivatives in the United States, had requested information exchange on financial derivatives as well whenever necessary; with this in mind, the existing Statement of Intent (''SOI'') concerning Cooperation, Consultation and the Exchange of Information concluded among the FSA, the CFTC and the Securities and Exchange Commission of the United States (SEC) was amended on January 16, 2006, in order to include financial derivatives within its scope.
     
  4. The document to amend the said SOI was signed when CFTC Chairman, Mr. Reuben Jeffery III, visited FSA Commissioner, Mr. Hirofumi Gomi, on the aforementioned date. In the meeting, the two exchanged their opinions on the importance of investor protection in relation to financial futures instruments, etc., and agreed that their cooperative relationship will become even more significant for that purpose.
*     For more information, please refer to ''Signing of the amendment to the Information Sharing Arrangement with the US Securities and Exchange Commission and US Commodity Futures Trading Commission'' (January 16, 2006) in the ''Press Releases'' section of FSA's website.
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Publication of Insurance Buyer's Guides


The Insurance Buyer's Guides produced by the Japan Institute of Life Insurance (JILI) and the General Insurance Association of Japan (GIAJ) were released to the public on their websites on January 23, 2006. For the purpose of enlightening consumers, the Guides summarize basic matters that should be considered when a consumer buys an insurance product, etc. in an easy-to-understand format.
The Guides are posted on the Financial Services Agency's website as well to make it common knowledge, in order to protect users and improve user convenience.

The Life Insurance Buyer's Guide explains:
(1)   Tips for signing an insurance policy (basic approach to signing a life insurance policy);
(2) How to select life insurance products (steps, tips for determining necessary coverage, mechanism of life insurance products, etc.);
(3) How to review coverage and points to consider (changeover system, add-on policies and special terms added to policy in the middle of the policy term, policy switching, etc.); and
(4) Points to consider when signing a life insurance policy (application for insurance policy, coverage commencement date, duty of disclosure, cases in which insurance money and other benefits are not receivable, cooling-off system, etc.).

The Non-life Insurance Buyer's Guide explains:
(1)   Types of non-life insurance (explanation by broadly dividing insurance into home insurance (fire insurance, earthquake insurance), automobile insurance (compulsory automobile liability insurance, voluntary automobile insurance) and personal insurance (personal accident insurance, medical insurance, etc.);
(2) Points to consider when signing a non-life insurance policy with respect to each type;
(3) General points to consider when signing a non-life insurance policy (insurance solicitor's authority, coverage commencement date, need to be given an explanation of important matters, need to confirm coverage, need to confirm insurance certificate, etc.); and
(4) Other matters that should be understood (cooling-off system, etc.).

The report titled ''Interim Summary of Issues: How Information Should be Supplied When Selling and Soliciting Insurance Products'' compiled by the Study Team on Insurance Product Sales and Solicitation of the Financial Services Agency (FSA) in July 2005 recommends that: (1) information be provided by insurance companies to customers in an appropriate manner; and (2) consumer enlightenment activities are important.
The Guide addresses these recommendations together with the partial amendment (draft) of the Comprehensive Guidelines for Supervision of Insurance Companies relating to ''policy overview'' and ''warning information'' which were released to the public and subjected to public comments recently. The FSA hopes that the two will complement each other to develop an appropriate environment in which consumers can purchase insurance products that meet their own needs.

(Note 1) The Study Team on Insurance Product Sales and Solicitation (headed by Professor Shuya Nomura at the Faculty of Law of Chuo University) conducts studies to tackle problems which have been pointed out in the insurance sector, namely, (1) there are still a large number of complaints about sales and solicitation, and (2) product features have become difficult for consumers to understand due to increasingly diversified and complicated insurance products.

(Note 2) The partial amendment (draft) of the Comprehensive Guidelines for Supervision of Insurance Companies divides important matters that should be explained during sales and solicitation for insurance policies into two categories, namely, ''policy overview'' (information required by customers to understand the nature of an insurance product) and ''warning information'' (information that customers should be made aware of by insurance companies), and clearly defines the framework of matters that should be stated in the two categories and how they should be written.
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