Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


June 2, 2008

[Opening Remarks by FSA Commissioner Sato]

Good afternoon. Please feel free to ask me questions.

[Questions and Answers]


According to data compiled by the Financial Services Agency (FSA) regarding the financial results announced by regional banks last week, fees and commission income declined particularly sharply, apparently due in large part to a drop in commissions on the sales of investment trusts. It is said that financial institutions have become cautious about selling investment trusts since the Financial Instruments and Exchange Act entered into force last September. Now that more than half a year has passed since then, have you detected any improvement in this situation? It has been pointed out that despite calls for a shift "from savings to investment," there is still strong preference for savings. What are your views on this?


As you said, regional banks' fees and commission income and financial institutions' investment trust sales have declined year-on-year. I believe that the cause of this has been a confluence of various factors, including market conditions, and so it is difficult to identify any single cause.

Meanwhile, as you pointed out, there have been complaints that some financial institutions have reacted excessively mechanistically in their response to the Financial Instruments and Exchange Act regarding their soliciting and sales activities since its entry into force on September 30 last year, in contrast to our premise that financial institutions would behave properly in accordance with the spirit and purpose of the act.

In light of this situation, the FSA released Frequently Asked Questions concerning the Financial Instruments and Exchange Act in February this year in order to clarify the concept of this act in relation to sales of and solicitation for financial products. Also, we have been striving to ensure that inspectors and supervisory officials fully understand the purpose of the act.

Moreover, the FSA reached an agreement with the financial industry on the "principles", as part of efforts toward better regulation (improvement in the quality of financial regulation). The first of these principles states that financial service providers are "expected to pursue greater customer benefits and fulfill their expected roles through voluntary efforts with creativity." This represents the central essence of the manner in which financial services providers should act. As the financial industry and the supervisory authorities have agreed with each other on these principles, I believe that we are entering a new phase of regulation. As I have repeatedly said, the basic concept of better regulation is that voluntary efforts of individual financial institutions should be respected. I believe that financial institutions are now in the process of exploring how financial business should be conducted in this new phase.

I would like to ask the management of banks to make identifying customer needs and properly meeting the needs the focus of their business, rather than trying to find excuses for defending themselves against the authorities. I believe it is much more productive for banks to make efforts to increase their profits and corporate value by earning the trust of customers by way of this approach.

I will keep a close watch on the benefits that such efforts will bring about. I hope that such efforts will become more widespread and the concept of better regulation will come to be better understood.

As for the continued strong preference for savings, which you mention, as you know, more than half of the financial assets held by individuals, worth 1,500 trillion yen in all, are held in the form of cash and bank deposits. In order to establish a society in which everyone feels affluent, we believe that it is critical to provide individual investors with appropriate opportunities to invest. The FSA has been implementing various measures, such as creating an environment favorable to investment by individual investors in risk-laden assets, including through tax measures and the diversification of products available on exchanges. The FSA intends to continue promoting a shift from "savings to investment."


Although it may be a bit premature to talk about this, the bill for the amendment of the Financial Instruments and Exchange Act has already passed through the House of Representatives and the enactment thereof is expected to take place this week upon its passage through the House of Councillors. Now that the enactment of this bill is within reach despite the unfavorable circumstances in the Diet that delayed the commencement of deliberations, how do you feel about this?


The bill you refer to passed through the House of Representatives last week and it is now under deliberation at the House of Councillors. As you know, the bill is a comprehensive package of measures aimed at making the institutional improvements necessary for strengthening the competitiveness of Japan's financial and capital markets, so I sincerely hope for its early enactment. The bill is under deliberation at the House of Councilors. With a view to ensuring its early enactment, the FSA will continue to make every possible effort, including providing explanations to lawmakers.

Also, the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, which was adopted last December, contains a number of non-legal matters, such as the initiative toward better regulation. The FSA has been making steady efforts regarding these matters as well. Among such efforts are a series of measures related to better regulation, the fostering of financial experts, the expansion of the scope of securities subject to the requirement for disclosure in English, the diversification of ETFs (exchange-traded funds) and the elimination of the PE (permanent establishments) risk in order to attract foreign fund managers. The FSA is working on such matters quietly but actively. I strongly hope that the combined effects of efforts concerning such non-legal matters and the revision of the Financial Instruments and Exchange Act will lead to significant progress in the implementation of the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets.


In regards to a case of insider trading at Nomura Securities, a former Nomura Securities employee and an associate were indicted today. Could you share with me your feelings on this case and how the FSA intends to respond to it?


Regarding this case, the Securities and Exchange Surveillance Commission (SESC) filed charges with the Tokyo Public Prosecutors' Office on May 30. The SESC has been strictly monitoring compliance with market rules in order to ensure the fairness of the market. As part of its monitoring activities, the SESC brings criminal charges against perpetrators of malicious acts, and I hope that such regulatory actions will contribute to the sound development of the securities market.

The Nomura Securities case is extremely regrettable particularly insofar as it involves a former employee of a securities company, which has a public role as a market intermediary. All managers and employees of securities companies must fully understand their public role and engage in business with an enhanced sense of legal compliance as well as a high level of professional ethics and self-discipline.

Also, this case reminds us that financial transactions and businesses are becoming increasingly diversified and globalized, and therefore that it is important to establish effective internal control systems that befit this new trend.

As you know, in late April the FSA asked all securities companies to take quick actions, such as reviewing their internal control systems. I believe that it is important that the industry as a whole puts in place measures to prevent incidents like this case while maintaining cooperation with self-regulatory organizations.


This time, the indictment was filed against an individual former Nomura Securities employee. What about taking administrative action or imposing punishment against Nomura Securities as a corporation?


Since this incident came to light, the FSA has been holding hearings as necessary regarding Nomura Securities' internal control system. Given the highly public nature of securities companies as market intermediaries, the FSA should consider cases like this with that nature in mind and securities companies should improve their internal control systems accordingly.

I would like to refrain from saying whether or not the FSA should take any specific administrative actions against individual companies or when such actions should be taken. In any case, we recognize that it is essential to establish effective internal control systems suited to the diversification and globalization of financial business as I mentioned earlier.


Regarding a case of insider trading at NHK (Nippon Hoso Kyokai, public broadcast station), a third-party committee submitted an investigative report last week. The report showed that there were some suspicious cases in which the employees concerned have not agreed to undergo voluntary investigation, although insider trading could not be confirmed. What are your views on the third-party committee's findings?


Generally speaking, insider trading, an act that undermines the fairness of the market, is a matter that must not be left unattended from the viewpoint of the sound development of the entire securities market. In this respect, I believe that the parties concerned must reconfirm the need to maintain a sense of legal compliance and pay renewed attention to the importance of ensuring professional ethics.

I understand that the compilation of the report was commissioned to the third-party committee on NHK's own responsibility in order to prevent the recurrence of such incidents, and so I would like to refrain from commenting thereon. Generally speaking, it is quite obvious that the market surveillance authorities must deal with cases of insider trading in accordance with laws and regulations. At a more fundamental level, it is essential that market players, including non-professional investors, maintain self-discipline and that market intermediaries and other parties involved in the transaction process improve internal rules and educate employees properly. In light of this incident, I hope that employees of all job description will enhance self-discipline in a manner befitting the characteristics of their duties.


I have another question about the Nomura Securities case. You mentioned the need to establish an effective internal control system. This, I suppose, implies that Nomura's internal control system was not effective. Prior to this incident, Nomura Securities had been involved in another insider trading case. I would like to ask you, as the top official of the regulatory body, to tell us how you think the management of Nomura Securities should take responsibility at this point.


As I told you earlier, I do not believe that I should comment on whether or not the FSA will take administrative action in future in relation to specific cases, when such actions will be taken or what actions these will be. As for our general view in regards to cases of insider trading, I have already shared this with you.


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