"Transforming the JFSA's supervisory approaches," recommendation by the Advisory Group on Supervisory Approaches

March 17, 2017
(This provisional translation was published on June 15, 2017)

The Financial Services Agency (JFSA) has made a multitude of reforms in recent years and its supervisory approaches, which were formulated during the Japanese financial crisis in late 1990s and early 2000s, are undergoing a major transformation. The agency, however, is yet to present an overall design of what it intends to attain. Legacy approaches, organizational design and guidelines stay while new initiatives are pursued. Stakeholders may be receiving mixed messages.
 
A regulator’s ultimate goal is enhancing national welfare by contributing to the sustainable growth of the national economy and wealth. Regulators have to continuously update their supervisory approaches by asking themselves if their approaches are consistent with their ultimate goal, if their approaches meet the requirements of the changing environment, and if mechanical repetition of their past approaches are creating unintended consequences. The Advisory Group on Supervisory Approaches was formed in August 2016 to recommend to the JFSA how it could discharge this responsibility. This report is the product of its deliberations conducted over six meetings.
 
The Advisory group’s key recommendations on the direction of the reform are as follows:

• Ensure that the agency’s supervisory approaches are consistent with its ultimate goal, not just with intermediate goals.
• Do not focus only on form: see substance. Do not focus on backward-looking checks: be forward-looking. Do not be satisfied with the analysis of elements: have holistic views.
• In addition to securing financial institutions’ compliance with minimum requirements, have dialogue with them on best practices. Shift from a framework dominated by static regulation to that complemented by dynamic supervision.

To complete the transformation, the agency will need to make a range of specific changes. The reports make recommendations on the changes to be made in supervisory processes and techniques, organizational structure, human resource policies, information infrastructure, the Inspection Manuals and the Supervisory Guidelines, dialogues with stakeholders, and the coordination between domestic policy formulation and contribution to the global regulatory reforms.
 
The Advisory group expects that the JFSA will form its own views on the issues discussed in this report and publish them with the timelines for the implementation of the recommendation. The Advisory group also expects the agency to engage with the management of financial institutions and users of financial services in developing more specific policies.
 
The Advisory group believes that the principles proposed in this report are applicable to the supervision of financial institutions in general, but they may need to be supplemented by policies specific to the sizes and the types of financial institutions. The Advisory group expects the JFSA to develop such policies going forward.