Unofficial and Provisional
Translation
Readers are advised to refer to the original
Japanese text before quoting from this document. |
Summary of the Interim Report of the First Committee of the Financial
System Council
(July 6, 1999)
I. Financial services fit for the 21st century
1. |
Financial and economic internationalization and advances
in financial and telecommunications technologies have enabled the provision of a diversity
of attractive financial products and services which go beyond the bounds of the existing
framework for financial institutions. The role of asset management and financing through
the market is, moreover, expected to grow in importance. Finance will play an increasingly
important role in not only lending (as in the past) but also in a wide range of areas such
as efficient national wealth creation to help meet the needs of an aging society, the
creation of new businesses and industries with promising growth potential, and corporate
governance. Finance will thus come to impact even more significantly upon the shape of the
national economy. |
2. |
To enable risks to be shared widely through the market, it is necessary to further clarify
and render transparent the relationship between the risks and returns inherent in
financial transactions. It is also hoped that a diverse range of financial products
(including medium-risk/medium-return financial products) will be made widely available to
meet the needs of a variety of investors, one means of doing so being through
"collective investment schemes", whereby funds pooled from a number of investors
are entrusted to the management of professional fund managers. A framework that will both
provide suitable protection for investors and give rise to a more diverse and attractive
range of financial products is therefore required for such schemes.
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3. |
The ultimate goal of deliberations on a Japanese version of a "Financial Services
Law" may be considered to be to transfer the focus of the concept of financial
services from institutions to the functional aspect of transactions per se. It is also
important to not only regulate the actions of institutions but also to clarify civil
(private law) rules for ensuring its effectiveness. Given the difficulty associated with
making the necessary changes to create the framework for such a radical system on a
theoretical basis alone, concrete changes should instead be considered on the basis of a
thorough understanding of the state of progress in reform of the financial system and of
the actual situation of market participants.
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What is therefore required at present is:
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1)
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To consider the rules required concerning the sale of and solicitation for customers for a
broad cross-section of financial products in readiness for the appearance of a diverse
range of financial products in the future; and
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2) |
To consider the rules required concerning collective
investment schemes (which provide products combining various risks and returns to the
public). |
II. Framework of rules underpinning new developments in finance
The financial system must be made fair and effective and be regulated by
clear and transparent rules. In view of the growing diversity and speed of change in
finance, it would be inadvisable to enshrine all such rules in law. The aim should instead
be to form the various rules at various levels (such as laws and ordinances, rules for
self-regulating organizations, and civil legislation) into a single integrated rule system
founded on the principle of self-responsibility.
Note:
"Rule" here means the totality of agreements (norms and standards)
concerning the division of responsibilities between and the rights and obligations of
parties to transactions and determining what each party may or may not do. These determine
in advance, for example, under what circumstances a person should enjoy returns and bear
risks. In this sense, therefore, rules do not directly mean just statutory rules and
administrative regulations, but also include everything such as agreements between parties
and arrangements concerning the internal management of financial service providers.
III. The scope of financial products covered by the framework for new
financial rules
In view of the purpose of "the Financial Services Law," in which
a broad interpretation of finance is adopted, financial products should be defined broadly
to include not only securities covered by the Securities and Exchange Law and traditional
financial products such as savings, insurance and lending, but also derivatives and the
various products created through the collective investment schemes covered by "the
Financial Services Law." Problems arising due to the different attributes of various
kinds of products should be addressed in the light of the relationship of such products to
the application of rules and the purpose of regulation.
Note:
Where the user is the recipient rather than the lender of funds (as in the case of
lending), proper disclosure and proper methods of recovering loans (conditions for
extending credit) become significant for ensuring user protection. Accordingly, such
financial products will need to be considered in more depth from a different perspective
to other financial products.
IV. |
Broad-ranging rules on sales and solicitation for
customers, and the distinction between professionals and non-professionals |
1. |
In order to determine broad-ranging rules on sales and solicitation for customers, it is
first necessary to imagine what sorts of users will be using financial products. In this
regard, therefore, users should be assumed to be capable of making independent decisions
aware of their own responsibilities. More specifically, there may be assumed to be three
categories of users:
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(a) |
Users capable of acting on their own responsibility unconditionally
(wholesale/professionals)
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(b) |
Users who can bear risks acting on their own
responsibility assuming that they have access to certain information (ordinary
retail/ordinary users) |
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(c) |
Users who cannot be held partly or wholly personally
responsible (specified retail/specified users) |
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With these three categories in mind, the best approach is to consider rules for category
(b) (ordinary retail and ordinary users), and then move on to the other categories to
avoid any omissions. |
2. |
In order to ensure the fairness and effectiveness of finance, it is thus important to
distinguish between wholesale and retail transactions and (with respect to trading
entities) between professionals and non-professionals (ordinary and special users), and to
consider rules applicable to each category. Detailed criteria by which to make the above
classifications need to be worked out in the future, while bearing in mind the need to
ensure clarity and objectiveness and also focusing on the categories determined mainly on
the basis of the entities involved in transactions. It will also be useful from the
perspective of respecting freedom of choice of users if use can be made of selections and
conversion regarding these categories
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3. |
The main rules governing sales and solicitation activities for financial products are
those concerning information provision requirements, the suitability rules, and
solicitation.
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(1) |
Information provision requirements are the obligation of institutions (financial service
providers) to provide information on important matters to users. Important matters may be
considered to mean information on common minimum standards for financial products as
defined by law, and other more specific matters as determined by rules established
autonomously by the private sector.
In order to clarify the rights and obligations of institutions and users under private
law, it should be made clear in the rules that if an institution fails to provide a user
with important information that should be provided, that institution will be liable to pay
compensation under private law.
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(2) |
The suitability rules mean that an institution' sales and solicitation activities should
be appropriate given a user' knowledge, experience, wealth and investment objectives, etc.
It was the majority view that in the light of the principle of self-autonomy, while it may
be considered prudent to limit certain transactions with specified users (the suitability
rules in the narrow sense), institutions should be required to adopt internal standards of
conduct, such as standards for developing sufficient means of knowing about users (the
suitability rules in the broader sense).
Strictly speaking, the suitability rules in its broader sense will be a rule concerning
internal codes of conduct to be observed by institutions, and although the inadequacy of
internal systems thus required may to a certain extent be taken into account in individual
lawsuits, it would be difficult to make the rule directly enforceable under private law.
The suitability rules in the narrow sense may also be applied to solicitation activities.
Thus attempts to encourage ordinary users with no experience of such transactions to
become excessively leveraged or agree to highly risky transactions that would leave them
with considerable debts could be prohibited and compliance strictly enforced.
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(3) |
Other rules on solicitation include:
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1) |
Prohibition of fraudulent solicitation activities, and
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2) |
Prohibition of misleading solicitation activities. |
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The specific details of rules applicable under the civil code and rules on the conduct of
institutions need to be examined.
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V. Rules applicable to collective investment schemes
1. |
Broadly speaking, there are two types of collective
investment scheme: |
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1) |
Asset management schemes: Schemes whereby funds from a number of investors are pooled and
invested in various assets and managed by professional fund managers.
Existing schemes of this type include securities investment trusts, commodity funds and
collective investment money trusts offering dividends proportionate to performance.
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2) |
Asset securitization schemes: Schemes whereby the cash flows earned from specified assets
are rearranged by professional arrangers, and securities sold to a number of investors.
Existing schemes of this type include securitized products covered by "the SPC Law
(the Law on Securitization of Specified Assets by Special Purpose Companies)," and
"the Law Regarding Regulation of Business Concerning Specified Claims' etc."
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2. |
Collective investment schemes entail the pooling of investors' funds for management by a
third party. Because of this, it is important to clarify rules to ensure schemes are
properly managed and the allocation of risks between the parties concerned is clarified.
At present, investor protection is provided through laws on individual types of
institutions which establish frameworks for protection corresponding to the
characteristics of the vehicles for and targets of investment. In order to develop an
environment capable of generating a broader, more diverse range of products that go beyond
the scope of the current legislative framework while at the same time providing suitable
protection for investors, the concrete details of a basic framework of rules that takes
into account the differences between asset management and asset securitization schemes
will need to be considered.
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3. |
The U.S. and U.K. have made it clear that financial service providers involved in such
schemes have certain duties as trustees, and the legal principle of fiduciary duty (which
requires that the fiduciary discharge certain duties) has become firmly established.
Fiduciary duty has not necessarily been clear in Japan, however. In order to develop a
legislative and rule-based framework for collective investment schemes to create an
environment capable of generating diverse and broad-ranging products, it is necessary to
clarify specific rules concerning fiduciary duty in the wide sense and to see that they
are actively adopted as codes of conduct for financial service providers.
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4. |
Rules governing collective investment schemes may be broadly classified as follows:
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1) |
Rules on arrangement of schemes,
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2) |
Rules on operation of schemes, and |
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3) |
Rules on transactions in the financial products thus
formed. |
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Rules should be clarified bearing in mind the need for such rules to differ depending on
the different characteristics of asset management and asset securitization schemes. |
VI. Enforcement of rules and education for consumers
1. |
In order to establish and ensure the effectiveness of
rules, it is important to assign appropriate roles to rules such as laws and ordinances,
legal principles established by judicial precedent, rules set by self-regulating
organizations, customary rules observed by participants in transactions, and rules on
internal risk control and compliance by individual businesses. |
2. |
Self-regulating organizations should preferably be capable of dealing with matters
relating to a broad range of financial products and services in a variety of fields, and
further deliberation will be required concerning their legal authority (or lack thereof),
the cost of their establishment and operation, and how to ensure their neutrality and
specialist status.
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3. |
The infrastructure for resolving matters judicially must be developed to provide the
ultimate means of ensuring compliance. To complement this, it is also worth considering
developing a system for settling disputes out of court.
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4. |
In order to allow users of financial products to make independent choices between various
financial products and services and enjoy their merits, it is essential to improve
consumer education and access to information. The industry has in fact made a steady
contribution in this regard by, for example, holding briefings, and it is to be hoped that
businesses expand such activities in the future. The administration also has an active
role to play in increasing public awareness of issues such as the scope of users·rights
and liabilities under the new framework of rules, and it is important that
consumers·basic knowledge of finance in general should be increased and consumer
education (including education in financial matters) be expanded. Improved consumer
education will thus need to be made more widely available, and if this is to be achieved
the assistance of professionals in education will be required.
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VII. Issues for further study and future approach
1. |
The Committee intends to continue studying the various
remaining problems associated with rules relating to sales and solicitation taking into
consideration the opinions given by various interested parties for this interim report.
The development of electronic commerce (such as that conducted via the internet) and rules
for non-face-to-face and cross-border transactions will also need to be considered.
Concrete rules for collective investment schemes will also be considered by the Committee
taking into account the features of current systems. |
2. |
While proceeding to examine such issues and bearing in mind progress in reform of the
financial system, the Committee will also be considering legal matters with the ultimate
aim of drastically revising the current legislative framework of individual laws covering
specific types of institutions.
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