Press Conference by FSA Commissioner Takafumi Sato
June 22, 2009
[Opening Remarks by FSA Commissioner Sato]
I have a few words to say about an increase in cases of fraud using false claims of affiliation with the Financial Services Agency (FSA) or the Securities and Exchange Surveillance Commission (SESC), regarding which the SESC issued a reminder last Friday. It is unforgivable that the names of the FSA and the SESC, whose important administrative purposes include protecting users and investors, are used for fraud, so I would also like to issue a reminder.
Recently, the FSA and the SESC have received many pieces of information concerning suspicious telephone calls placed by people claiming affiliation with the FSA, the SESC or an organization with similar-sounding names and trying to promote unlisted stocks supposedly scheduled to be listed or offering to undertake negotiations about the purchase of unlisted stocks.
FSA and SESC employees never place such telephone calls, nor do the FSA or the SESC ever commission outsiders to do so. I would like to ask citizens to be on guard against such telephone calls.
I would also like to ask citizens to contact the FSA's Counseling Office for Financial Services Users or the SESC's contact office and report to police if they have received such telephone calls.
I do not have any further statement to make.
[Questions and Answers]
The other day, the U.S. government announced a major reform of financial regulation, one of whose pillars is placing systemically important major financial institutions under the central supervision of the FRB (Federal Reserve Board). I understand that the FRB, which has until now been responsible for macro-level financial supervision, will thus take over responsibility for micro-level financial supervision as well and conduct financial supervision in an integrated manner. In relation to this, I would like to ask several questions.
First, I would like to know how you assess or view this U.S. initiative.
Second, how much do you expect this U.S. financial regulatory reform will affect Japan's megabanks?
Third, while the U.S. government apparently intends to call on other countries to move in step with the United States in financial regulatory reform, what is your vision of future financial regulation in Japan?
Last Thursday, June 17, local time, the U. S. government announced a proposal for the financial regulatory reform. The reform has five objectives. First, promoting robust regulations and supervision of financial institutions. Second, establishing comprehensive regulation of financial markets. Third, protecting consumers and investors using financial services. Fourth, providing the tools necessary to manage financial crises. Fifth, raising international standards and improving international cooperation.
I understand that the objectives of the proposed U.S. regulatory reform represent the concept of the rebuilding of the regulatory framework, which is regarded as a common global challenge based on the recognition that it is necessary to restore the robustness of the financial systems and markets so as to prevent a recurrence of the global financial market turmoil that was triggered by the subprime mortgage problem.
From the viewpoint of Japan, the proposed reform measures can be classified into two broad groups.
The first group concerns the reorganization — or I should say the redefinition of the scope of jurisdiction — of the financial regulatory and supervisory authorities that stems mainly from the domestic circumstances of the United States. This stems from the unique situation of the United States: the country's financial and regulatory systems are complicated, with separate financial regulatory and supervisory authorities overseeing different business sectors and the federal government and state governments exercising their respective authorities. In this regard, Japan will watch future developments calmly.
The other broad group comprises measures with global implications for how future financial regulation should be conducted.
One of them, which constitutes a major pillar of the reform, is the adoption of a macro-prudential policy, which seeks to strengthen the stability of the financial system as a whole with systemic risks in mind. On this point, Japan is in deep agreement with the United States, and Japan will need to study this matter in relation to how its own financial regulation and supervision should be conducted while carefully watching global developments from the viewpoint of realizing internationally consistent regulation and supervision. We should also strive to ensure appropriate supervision while strengthening our cooperation with foreign supervisory authorities as well as with the Bank of Japan, although there is already considerable cooperation.
This group also includes the introduction of the regulation and supervision of hedge funds, the establishment of a resolution regime for large and complex financial institutions whose failure could have serious adverse effects and the strengthening of regulation and supervision of the securities market, for example, as part of the reform of the regulation of markets. This reform includes the requirement that originators and sponsors of securitized products retain a financial interest in the securitized credit exposures (assets exposed to credit risk), a measure for which Japan has argued since around the end of 2007. Also included in this group is the establishment of a comprehensive regulation on OTC (over-the-counter) derivatives as well as the strengthening of the supervision of systemically important payment, settlement and clearing systems. Japan will carefully watch developments related to these matters with strong interest.
As for how the U.S. financial regulatory reform will affect Japan's megabanks, I should refrain from making any comments for now, as only the outline of the reform was announced and a detailed proposal needs to be drafted and adopted as a bill and undergo the process of Congressional deliberation. In any case, basically, the authorities of individual countries should properly deal with their own financial system problems in light of the conditions of their respective financial sectors (of course while maintaining international coordination and cooperation).
Now, I will move on to your question concerning the vision of future financial regulation in Japan, which is a very significant issue. We should consider future regulation with the matters that I mentioned in mind and with a resolve to seek an internationally consistent regulatory framework while carefully examining the current situation and considering the international nature of financial transactions. However, the need for international consistence does not necessarily mean that regulation and supervision should be common and universal across all countries, and we should study this point with a cool mind.
About two years ago, the FSA announced the better regulation initiative, a package of measures which seeks improvement in the quality of financial regulation. As the second of the four pillars of this initiative, the FSA has advocated a timely recognition of priority issues and effective response as well as a risk-focused, forward-looking approach. Meanwhile, strengthening cooperation with foreign authorities, carefully monitoring market developments and using the results of the monitoring in daily supervisory activities were included among the five specific measures taken under the initiative. The initiative also included strengthening the authorities' overall analytical and supervisory capabilities. The implementation of the better regulation initiative provides an important broad direction when we consider how Japan's future financial regulation should be conducted.
Last week, the FSA took stringent administrative actions against Japan Digital Contents Trust, or JDC Trust, including ordering the company to partially suspend business operations. The main reason for this was the company's embezzlement of assets entrusted by customers. An incident like this could undermine the credibility of the trust system itself.
I would like to ask two questions in relation to this case. First, could you explain the reason for the stringent administrative actions? Second, do you know of any cases of similar embezzlement of entrusted assets at other trust companies that have entered the trust business after the revision of the Trust Business Act?
On Thursday, June 18, the FSA ordered Japan Digital Contents Trust to partially suspend business operations for three months and to take business improvement measures, including thoroughly protecting beneficiaries.
On June 6, 2008, the company was ordered by the director-general of the Kanto Finance Bureau to take business improvement measures, including strengthening its systems for legal compliance, internal control and governance. Later, the company also submitted a report on misconduct, and it was found to have committed many illegal acts.
Specifically, first, the company used funds provided by the trust account for advertising purposes for a different purpose. Second, the company embezzled trust assets by withdrawing them from the trust account in the name of an advance payment of trust fees. Third, the company's annual securities report contained false statements. Fourth, the company violated the restriction on directors serving in multiple posts concurrently. Fifth, its internal control system was not strong enough to prevent these four illegal acts that I mentioned now. Sixth, the value of the company's net assets fell below 100 million yen.
We have concluded that in light of the criteria for punishments announced by the FSA, such as the level of damage, the background to the illegal acts, the presence or absence of mitigating factors and the wisdom of leaving the offending company to make improvement on a voluntary basis, the company should be ordered to suspend business operations and take measures to ensure thorough protection of beneficiaries, as it bears grave responsibility for committing serious illegal acts in breach of the trust of beneficiaries in the company, which is operating based on a license granted by the government.
As for your question as to whether a similar situation has not arisen at other trust companies, we are not aware of any such cases at the moment. Generally speaking, the FSA will take appropriate supervisory actions based on relevant laws and regulations, including the Trust Business Act, if there are problems with the appropriateness and soundness of trust companies' business operations.
Last week, the Diet enacted the Act concerning Financial Settlements, thus allowing companies other than banks to make exchange transactions. I understand that companies engaging in this business, called “fund transfer business,” will be required to register with the FSA. What kind of services do you expect will be provided? Also, could you tell us about the ceiling on the transaction amount and the schedule of the enforcement of this act, both of which have not yet been revealed?
In addition, as a result of debate at the Financial System Council, two competing arguments were listed (in a report drawn up by the council) with regard to the payment-collection and cash-on-delivery services. Some people still have doubt in light of Supreme Court precedents. Could you tell us about legal consistency···
Doubt about what?
Some people apparently think that there is a gray zone: that the payment collection agency may involve a service similar to an exchange transaction. Do you have any plan to reconsider the issue of legal consistency in the future?
On June 17, the Act concerning Financial Settlements was enacted at the same time as the act to partially amend the FIEA (Financial Instruments and Exchange Act), and I would like to express my deep appreciation for the support provided for the enactment of these acts.
The Act concerning Financial Settlements not only strengthens the framework for interbank financial settlements and clarifies the regulation of the server-based advance payment method but also defines the so-called fund transfer business, thereby establishing a framework that encourages the provision of higher-quality services based on a diverse range of payment and settlement methods. Meanwhile, the viewpoint of protecting users is very important when payment and settlement methods are diversified, so this act has provisions for limiting the scope of allowable transactions to small-lot ones and ensuring the credibility of business operators.
As for your question about the ceiling on the transaction amount, the FSA will steadily put into force relevant Cabinet orders and Cabinet Office ordinances in preparation for the enforcement of this act. In doing so, we intend to achieve a balance between enhancing the protection of users on the one hand and improving convenience for users and maintaining the vitality of the financial system on the other hand.
Under this framework, so-called money transfers, or exchange transactions that have until now been allowed only for banks, may be made by entities other than banks. In relation to what you mentioned earlier, I believe that this act will be effective in enhancing legal stability.
As for issues related to the cash-on-delivery and payment-collection agency services, I understand that a report written by the Financial System Council described them as issues that should be addressed in the future. Therefore, while keeping these issues in mind, we will explore pragmatic and best solutions according to the circumstances of the time.
I have one more question concerning JDC Trust. I hear that in some cases, existing customers of JDC have been refused their request to transfer assets to other trust banks solely because they are JDC's customers. How will the FSA deal with such cases?
While we are not aware of such cases at the moment, generally speaking, whether a trust contract is signed or not should be decided through negotiations between the parties concerned. However, I believe it is desirable that trust companies act in light of the actual situation of customers and the contents of their trust contracts, rather than making judgment mechanically by paying attention only to formal factors related to their transactional relationship.
In relation to this, as part of our order for JDC Trust to take business improvement measures, we require the company to quickly take necessary measures to protect beneficiaries, including canceling trust contracts and changing the trustee, and we will watch the implementation of those measures.
Concerning the FIEA, I would like to ask you about the financial ADR (alternative dispute resolution) system. The number of complaints related to financial products and services has not decreased and remains near a record high level, whereas little progress has been made with regard to mediation. Could you tell us how the FSA will be involved in the processing of complaints and mediation?
As you know, the FSA's broad administrative purposes include protecting users and investors. Until now, the mainstream approach of the supervisory authorities, including the FSA, to financial administration has been to regulate and supervise business operators that have engaged in inappropriate transactions with customers and take necessary actions if problems are found as a result of investigation. This approach has of course been very effective. However, while the administrative authorities can take actions against business operators that have handled customers in an inappropriate manner, it is impossible to make judgment in each individual case as to whether the business operator or the customer has made a more reasonable argument.
Under these circumstances, the establishment of the financial ADR system has been a landmark event for the user protection policy as part of financial administration. This provides a mechanism through which the providers and users of financial services seek solutions to their disputes themselves. It is very important that this mechanism be exercised in a fair, neutral and efficient manner, and we strongly hope that a framework for highly reliable ADR will be established quickly. The FSA will not only take necessary legal measures to put the system into practice but also keep watching with strong interest how ADR organizations for individual business sectors will be established and how the established organizations will be managed.
Last week, British FSA (Financial Services Authority) Chairman Turner visited Japan and held talks with you. Could you tell us about the key points of what you discussed with him and what you told Chairman Turner about Japan's stance on the recent international debate about the capital adequacy ratio requirement?
We are exchanging views with officials of foreign regulatory and supervisory authorities through bilateral and multilateral channels on a daily basis. However, as we usually refrain from disclosing the details of our discussions, we will give you just a brief outline.
We exchanged views on a variety of issues, and I told him about Japan's experience of its own financial crisis of the 1990s, its response to the ongoing global financial crisis and the lessons Japan learned. In addition, we had a frank exchange of views on how global financial regulation should be conducted.
Regarding the capital adequacy ratio requirement, as I have said on various occasions, a bank's capital is a buffer to absorb unexpectedly large losses that the bank may suffer. If there is an adequate buffer, it will maintain the bank's soundness and enhance its chance of survival and the sustainability of its business. Therefore, a balanced debate that pays attention to this basic function of capital is important. This is the outline of what I told him about.
Last weekend, a working group on the desirable status of cooperative-structure financial institutions issued an interim report, which pointed to the need for a fundamental, multi-faceted review of the business types, including a study on the possibility of establishing a new business type focusing on small-lot loans and unifying the shinkin bank and credit association types. Could you tell us about your view on this proposal?
Last Friday, June 19, the working group on the desirable status of cooperative-structure financial institutions worked out an interim report summing up points of debate, which pointed out that the primary role of cooperative-structure financial institutions is exercising the financial intermediary function as specialists in regional finance and finance for small and medium-size enterprises (SMEs). I understand this role naturally includes the consumer finance and finance for local SMEs that you mentioned in your question. I believe that it is very important that the financial intermediary function is exercised properly in these fields, and I understand that the working group is studying what measures should be taken to better exercise the function and how various systems and environments should be developed while identifying the factors that may impede the exercise of this function.
The measures under consideration include ones that can be implemented under the existing framework. I also hear that many of them are measures that should desirably be implemented voluntarily by relevant parties. I hope that through the implementation of those measures, the primary role of shinkin banks and credit associations will be adequately performed.
In response to the financial crisis, a bill for the purchase of stocks drafted by the ruling parties has been enacted. When do you expect Japan can shift from this extraordinary, emergency response approach to a normal approach and how you assess the current situation?
As I always say, the various extraordinary, emergency measures that have been taken to deal with the crisis include many public-sector support schemes, including the injection of capital into financial institutions. Such extraordinary, emergency measures are necessary in times of crisis, and their timely implementation is very important for preventing a further downturn of the real economy.
On the other hand, if such measures are continued aimlessly and indefinitely, for example, we may face problems such as the loss of market discipline and the spread of moral hazard. The existing measures have been adopted with such possible problems in mind on the premise that they are indispensable in dealing with the crisis.
Therefore, generally speaking, the government does not intend to continue those measures aimlessly and indefinitely. However, before we consider when we should shift back to a normal mode and how quickly the shift should be made, we will need to carefully monitor and analyze the current situation. Some people think that the conditions of the financial markets and the real economy have stabilized somewhat compared with some time ago. On the other hand, I understand that downward risk and risk factors still remain. Therefore, although we should study an exit strategy, we need to be very careful in considering specifically how we should implement that strategy.
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