Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


April 21, 2008

[Opening Remarks by Commissioner Sato]

Good afternoon. I have nothing particular to report to you.

[Questions and Answers]


I will ask you about last week's rejection of an application from TCI (the Children's Investment Fund) to acquire additional shares in J-Power (Electric Power Development Co.). Regardless of the conclusion of the screening, I think that it may be argued that the decision will discourage foreign investment in Japan on the grounds that the screening process is not transparent. What do you think in this regard?


This is a matter to be screened and decided by the Ministry of Finance (MOF) and the Ministry of Economy, Trade and Industry (METI), based on the Foreign Exchange Act (the Foreign Exchange and Foreign Trade Act). Therefore, as this is outside the jurisdiction of the Financial Services Agency (FSA), I would like to refrain from making comments on the screening process or results.

If I am to speak in general terms, I will repeat what I have been saying. Our stance on foreign investment in Japan is that, on the one hand, there is a need to impose restrictions according to the public nature of the business or project concerned. On the other hand, we need to strengthen the competitiveness of Japan's financial and capital markets and reinvigorate them, which is a top priority task for the government.

The most important thing for us to do is to reconcile these needs. Anyway, I hope that the MOF and METI will continue in their efforts to provide clear, easy-to-understand explanations in order to avoid creating the impression that Japan's markets are closed.


My question concerns the 14 principles (regarding financial services) announced last week. Various opinions have been raised in the private sector, such as one questioning whether this kind of arrangement will suit Japan well. What is your hope in introducing these principles, and which matters will be affected by them?


Thank you very much for asking. This is the question I have been waiting for. In the efforts toward better regulation (improvement in the quality of financial regulation), I believe that the concept of an "optimal combination of rules-based and principles-based supervisory approaches" is extremely important. Although it may not provide a solution for specific problems or issues, I expect that, from a medium-term perspective, this concept will be essential for making the FSA's financial regulation more effective and enhancing its efficiency, transparency and fairness.

As you know, principles, as opposed to rules, must not be something that is imposed by the supervisory authorities on the supervised financial institutions. My understanding has been that it is extremely important to ensure that principles are shared between the supervised financial institutions and the supervisory authorities. Therefore, we held discussions at cross-sectoral forums and with organizations representing individual business sectors on several occasions in December and thereafter, before formally adopting the principles on April 18.

The sharing of principles is significant in several respects. Firstly, from the viewpoint of financial service providers, it is expected to clarify the basic concept of what actions to take and provide guidance on how to make voluntary efforts to improve their services. In other words, the principles indicate the direction of the improvement efforts that financial service providers are supposed to make and serve as the basis of their best practices.

Secondly, by conforming to the basic concepts indicated in the principles, we, the supervisors, will be better able to take regulatory action in a fair manner suited to the actual circumstances when interpreting and enforcing rules.

Thirdly, from the viewpoint of financial service users, the benefits that are brought about by the first and second points I have mentioned may help to create a favorable environment for them to use financial services with a sense of security, by enhancing their understanding of how financial service providers are supposed to act and what level of quality their services are supposed to have.

Going forward, the FSA will strive to conduct financial supervision in a more effective and efficient manner while ensuring an enhanced level of predictability for its regulation, by seeking closer communications with financial service providers through continued dialogue with them based on these principles.

We are aware that the FSA itself must make strenuous efforts in order to bring about the benefits I have mentioned. It is essential to make sure that all FSA staff properly understand the purpose for which these principles have been established and how to apply them. It is important to try to ensure that when laws and regulations are enforced, their underlying philosophy is examined, and that when regulatory actions are taken and regulatory decisions made, the fundamental question of why the given rules exist in their current form is revisited. It will take some time before such an ideal state of affairs can be realized. However, we intend to keep this approach effective through making constant efforts.


Another question about the principles: The Financial Instruments and Exchange Act was put into force last autumn, and the FSA later released a collection of Q&As in response to cases of overreaction to the new act. Moreover, in March, the FSA was forced to provide explanations with regard to 11 typical cases of misunderstanding about the internal control (report system). Is there not concern about the possibility of a similar situation occurring in relation to these principles? That is to say, are you not worried that there will be an overreaction to what the regulatory authorities have introduced this time as well?


With regard to the full enforcement of the Financial Instruments and Exchange Act and the implementation of rules concerning internal control that you mentioned, we have released a Q&A collection and the like, believing that it is important to correct misinterpretations and misunderstandings. In the context of the issue of rules and principles, this may be seen as an action to provide specific examples of how the rules - be they rules on internal control or rules on the sale of risk-involving products under the Financial Instruments and Exchange Act - should be enforced from the broader viewpoint of the purposes for which those rules have been established. In that sense, an action like this may be seen as part of our broader efforts toward better regulation.

Now, I will turn to your question: is there not concern that the 14 principles agreed upon this time will be interpreted as rules that may be used as a basis for taking administrative disciplinary action? Will they not thus prompt financial service providers to overreact, like in the cases of the Financial Instruments and Exchange Act and the rules on the internal control report system? As we made clear in our press release last Friday (April 18), these principles should be used as a reference for financial service providers to make voluntary improvement efforts or adopt best practices, and the FSA will not take disciplinary action solely on the basis of the principles. We also made it clear that even if we are to take disciplinary action, voluntary efforts made based on these principles would be considered as an attenuation factor. In short, the purpose of the principles is to set the broad direction of desirable practices to be employed by financial service providers, and I hope that they will not be seen as strict rules. For its part, the FSA will take care to avoid creating misunderstanding by maintaining communication with the financial service providers we supervise on a daily basis regarding the nature and role of the principles.


I will ask you about the principles again. I understand that financial service providers in some business sectors have not yet agreed to the principles. An agreement may not be a precondition for the introduction of these principles, but do you intend to seek to apply them across a broader range of sectors in the future?


In that respect, as the nature of services and the ways of providing them differ from sector to sector, flexible thinking will be necessary with regard to how the supervisory authorities should deal with the supervised institutions. Therefore, I do not necessarily think that it is appropriate to seek to have all business sectors completely agree to a uniform set of common principles.

To elaborate further on the issue of rules and principles, when ordinary investors who are not usually subject to the FSA's supervision engage in illegal practices when making exchanges or market transactions, rules-based enforcement should be applied from the viewpoint of ensuring transparency, predictability and fairness. As for licensed business operators such as banks and insurance companies, meanwhile, there is a strong need for them to make voluntary efforts to improve their systems for ensuring compliance with laws and regulations and protection of users and to establish proper risk management systems. In this regard, we strongly hope that they will make voluntary efforts based on the principles, rather than merely complying with the broad rules.

What I have talked about just now are two extreme cases, and I think the points of emphasis may differ slightly from sector to sector. Although we made clear which sectors have agreed to share the principles with us in the press release on April 18, we will also talk with other business sectors in the future if necessary. Since they are substantially different in business nature and may not be suited to sharing the principles, it may not necessarily be appropriate to seek to have them reach a similar agreement with us. Anyway, I believe that it is important to maintain substantive communications with the financial service providers we supervise.


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