Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, February 28, 2012, from 10:00 a.m. to 10:26 a.m.)

[Opening Remarks by Minister Jimi]

I do not have anything particular to announce.

[Questions & Answers]

Q.

I would like to ask three questions concerning AIJ Investment Advisors Co., Ltd.

First, at your press conference after the cabinet meeting last Friday, you said that the Financial Services Agency (FSA) would conduct across-the-board checks. Could you tell me about details such as when the checks will begin and end, and what the checkpoints will be?

A.

Regarding the administrative action that the FSA has taken against AIJ Investment Advisors, I am taking this incident very seriously. As I stated at the previous press conference, the FSA has decided to conduct a survey targeting all companies managing customers' assets based on discretionary investment contracts and will issue an order for the submission of reports within a few days.

The FSA staff is working out the details of the survey, so I will be able to inform you soon. As for when the survey will start, I would like to issue an order for the submission of reports tomorrow, Wednesday, February 29, if possible. We will announce the outline of the survey, and the FSA staff will hold a briefing, probably tomorrow morning.

Q.

Second, regarding this case, some people are questioning the responsibility of trust banks that had the relevant assets under their custody. What is your thought on that point?

A.

I presume that you are asking whether there is not any problem with the role played by trust banks as the custodian of pension assets. In this case, under the contract terms, trust banks were responsible for managing and administering assets in accordance with instructions given by AIJ Investment Advisors based on discretionary investment contracts with pension fund operators and other clients, so I understand that they were not in a position to make investment decisions. In any case, according to the report submitted by AIJ Investment Advisors in response to the order for the submission of a report, the company is closely examining the cause of the loss of customers' assets, and the Securities and Exchange Surveillance Commission (SESC) is also closely examining the cause through its own inspection, so the FSA refrains from making comments at this time.

Q.

I have one more question. Could you tell me about measures to prevent the recurrence of cases like this that may be taken, including by trust banks? A media report today said that the FSA may be considering moving the borderline between professional and non-professional investors and requiring the provision of detailed prior explanations of risks when selling financial products to pension fund operators. Could you comment on that and other measures that may be taken in the future?

A.

Your question is very reasonable. However, as the SESC is still conducting inspection, we will need to wait until the facts are clarified. As you know, in a situation like this, it is important that the SESC first clarify facts and then we identify the cause and take measures to prevent the recurrence of problems. First of all, we will need to wait for the clarification of facts by the inspection authority. The FSA, as the supervisory authority, has decided to conduct a survey targeting all companies managing customers' assets based on discretionary investment contracts. Based on the results of these activities, the FSA and the SESC, in close cooperation with relevant government ministries and agencies, will make every possible effort to clarify facts, examine the cause and take measures to prevent the recurrence of cases like this, without ruling out any option, including the revision of the regulation and supervision of investment management companies, pension fund operators and trust banks, as I mentioned earlier.

If I remember correctly, companies engaging in discretionary investment business were formerly required to be authorized under the Investment Advisory Act. However, as a result of the amendment of the Financial Instruments and Exchange Act in the era of the Koizumi cabinet, when Mr. Yosano was the Minister for Financial Services - that was an era of unrestrained deregulation - a shift to the registration system was made.

I have one more thing to mention - this is quite a personal story, so you may just let my words go in one ear and out the other. As I am a doctor by profession, I served as deputy chairman of the Liberal Democratic Party's (LDP's) Social and Labor Division in 1990. Around that time, Japan was in the midst of the bubble economy era, and as you know, until around that time, the entrustment of pension funds was limited to trust banks and life insurance companies. From around the time when I became a Diet member in 1983, I continued to work for the Social and Labor Division.

Of the 720 current Diet members, I and Bunmei Ibuki are probably about the only people who were involved in the establishment of the basic pension system in the major pension system reform of the Showa Period.

I worked with Sadakazu Tanigaki (who is now the LDP president) to establish the basic pension system in the major pension system reform of the Showa Period. It was a drastic reform. Mr. Tanigaki was also a member of the Social and Labor Division. I became a Diet member slightly earlier than he. When we attended a public hearing in Kagoshima - Mr. Kazuo Aichi became the committee chairman around that time - Mr. Tanigaki missed his flight, so I was the only Diet member to attend it from the ruling party. Probably, Tomiichi Murayama of the Socialist Party attended it from the opposition camp. Since around that time, I have been studying this matter. When I attended a meeting of the Social and Labor Division in 1990, liberalizing the entrustment of pension funds was on the agenda, so I expressed opposition. I argued that share prices would not continue rising for ever but would drop sooner or later. At that time, everybody was expecting that share prices would continue rising for ever. Therefore, the atmosphere was such that people felt as if they would miss the bus if they did not use the service of investment advisory companies to gain a favorable return on assets, and there were people and government organizations who actively promoted such moves, although I would not name them. I strongly argued that pension funds should be invested in safe and secure assets in light of the fundamental nature of social security, so the liberalization that allowed pension funds to be entrusted to investment advisory companies was postponed one year, as I remember it. Those are my personal memories.

Although this is not a matter under my jurisdiction, I think that pension fund operators should be allowed to gain returns under an appropriate framework developed by the government as they like, although the principle of self-responsibility should apply in exchange. Under laws, the pension system has three tiers: the first tier is basic pension, the second is employee pension and the third is corporate pension. Although this is an area where self-help efforts should be made in principle, elderly people depend on the pension system, so the government is involved to some degree. In that sense, I think that politicians may respect both stability and the pursuit of return in exchange for taking risk, as we live in a liberal society. For politicians in a liberal society, where to draw the line is very important. In 1990, I was the only member of the Social and Labor Division to oppose the liberalization of pension asset entrustment. Regarding problems related to the postal businesses, too, a dynamic market force is in play, so the amount of funds handled is increasing and the economy is developing. However, there are also human relationships, so where to draw the line is very important for politicians in a liberal society.

For example, some people say that police are not necessary. However, do police earn profits? No, they don't. Nevertheless, if police did not exist or if police demanded money in exchange for coming to your rescue, there would be no security. Thus, although earning profits is important, ensuring public interests, such as stable security and comfortable life is essential. Nobody would say that security-related work should be entirely entrusted to security companies because allocating budgets for police would be a waste of money. In the world of finance - I am now serving as the Minister for Financial Services although I am talking about pension funds today - I believe that all politicians should judge how to strike the balance based on their views of what our country should be like, their historical perspectives and values. A person may become either an angel or a devil, according to a Hindu idea. I believe it is important that some security is provided by society in any situation.

Q.

What do you think of the idea of rescinding the license of AIJ Investment Advisors, which has caused a serious problem like this?

A.

There have been various newspaper and TV reports about that. Earlier, I said that this is a very serious case. Naturally, we should first clarify facts, examine the cause and prevent a recurrence. Japan is a constitutional country, and as the SESC is still conducting inspection, it is necessary to clarify facts. As I said earlier, I would like you to understand that with such matters in mind, the FSA is strongly resolved to deal with this case without ruling out any option while closely cooperating with relevant government ministries and agencies.

Naturally, as the SESC is still conducting inspection, we will need to wait until facts are clarified. Even so, I take this case very seriously and think that it was very regrettable, so I would like you to understand our position with all those things in mind.

Q.

I have just one more question. Can you receive cooperation from other countries when investigating the involvement of entities in the Cayman Islands?

A.

As for the Cayman Islands, which is known as a tax haven, U.S. President Obama mentioned the idea of reducing tax havens, and there have been media reports about that. However, as the SESC is still conducting inspection, I would like to refrain from making comments. In any case, there are some regions known as tax havens in the world, as was mentioned in the Summit meetings. I think that it is necessary to consider whether the presence of tax havens is favorable or unfavorable for the financial industry as a whole. There are some tax havens in the world.

Q.

I would like to make sure about one thing. Regarding the idea of rescinding AIJ Investment Advisors' license, may I take it that you earlier said that you would not rule out any option?

A.

I will deal with this case without ruling out not only that idea but also any other option.

Q.

Let me ask you about a different subject. Regarding measures to prevent a recurrence of cases like this, you mentioned the shift from the authorization system to the registration system. Does that mean that you will consider a fundamental review as to whether to maintain the registration system or revert to the authorization system?

A.

I will not rule out any option, which means I will consider taking prevention measures that are most appropriate to our era while reflecting on that sort of thing.

Q.

Although this case concerns the third tier, namely the private portion of the pension system, worries over pensions are spreading among the people, so I would like to ask you two questions. First, looking back at the long history of the pension system, what do you think of the government's responsibility, or in other words, what do you think was problematic about the administration of the FSA and the Ministry of Health, Labour and Welfare in relation to this case?

A.

As I said earlier, it is basically the responsibility of the Ministry of Health, Labour and Welfare to authorize employee pension funds. However, the FSA has jurisdiction over investment advisory companies, which undertake pension asset management. Therefore, in any case, I think that it is very regrettable that a situation like this has arisen. As for the cause of this situation, as the SESC is still conducting inspection, we will have to wait until facts are clarified. Based on the results of the inspection, the FSA and the SESC will make every possible effort to prevent the recurrence of cases like this without ruling out any option while closely cooperating with relevant government ministries and agencies.

Q.

I am afraid that you did not answer my question. The Ministry of Health, Labour and Welfare started to move toward revision, as did the FSA. That means, I would presume, that there were problems with the administration of the FSA and the Ministry of Health, Labour and Welfare. My question was this: What were the problems as you see it?

A.

As for the cause of this case, the SESC is conducting inspection, so it is necessary to clarify facts. We are acting quickly. We have taken administrative action before receiving a recommendation from the SESC as an exceptional measure. As the supervisory authority, we also intend to conduct a survey targeting companies managing customers' assets based on discretionary investment contracts. Based on the results of these activities, the FSA and the SESC, in close cooperation with relevant government ministries and agencies, will make every possible effort to prevent a recurrence of cases like this, without ruling out any option, including the revision of the regulation and supervision of investment management companies, pension fund operators and trust banks.

Q.

I have one more question. Some people in Nagatacho (the Japanese center of political power) and the market have pointed out the possibility that this case could have some effects on the integrated tax and social security reform that the Noda cabinet is promoting. Do you see such possibility?

A.

As I am the Minister for Financial Services, I believe that it is important to identify facts, especially in relation to the discretionary investment contracts, and to take appropriate action if any particular problem is found.

Although I say this, after detecting problems through inspection, I quickly took every possible action within my power, including issuing a business improvement order within the same day, as this case has a significant impact, and I expect you to understand that. From the political perspective, it is very regrettable that cases like this cause strong worries among people who have entrusted pension assets, so we are proactively taking measures so that facts related to the case of AIJ Investment Advisors will be clarified as soon as possible.

Q.

Let me ask a question for confirmation. As to the whereabouts of pension funds entrusted to AIJ Investment Advisors, you said that a close examination is ongoing. While it has been reported that most of the entrusted funds were lost, what is the estimated amount of lost funds?

A.

On that point, the SESC is still conducting inspection, so it is too early for me to comment on such specifics.

Q.

I understand that the Ministry of Health, Labour and Welfare has announced that pension fund operators that have entrusted funds to AIJ Investment Advisors have a total of 530,000 pension members and that 340,000 people are currently receiving pension benefits. How do you feel about the large number of people affected by this case?

A.

I have not cross-checked those figures with the FSA's data to make sure that they are accurate. In any case, the third tier of the pension for hundreds of thousands of workers is affected. Therefore, as I mentioned earlier, the number of people affected is not small, so I take this case very seriously in that respect.

(End)