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On January 18, 2008, the FSA's Financial Research and Training Center (FRTC), together with the 21 Century COE-Market Quality project of Keio University, held its fourth international conference with the theme "Regional Finance in Recent Period and the Way Forward''. A total of around 200 people from Japan and abroad participated in the conference, including researchers and government officials as well as representatives from financial institutions and foreign embassies in Tokyo.

In Japan, regional financial institutions have been promoting various initiatives for the rehabilitation of small and medium-sized enterprises (SMEs) and regional revitalization in order to enhance the function of so-called "relationship-based banking." Despite the progress made in such initiatives, however, there are complaints from customers of regional financial institutions, including SMEs, that some initiatives have not produced sufficient results.

Therefore, the participants in this conference compared and examined the situations in Germany, where regional finance is said to have contributed to the revitalization of regional economies, and those in other parts of Asia, where local communities and SMEs have ample access to loans, as well as the situations in Japan. In addition, discussions were held on whaht kind of role regional finance should play in Japan in the future.

Session 1: Experience and current status of regional finance in Japan

In this session, the FSA first reported on the results of an action program for relationship-based banking implemented in fiscal 2003 and 2004, as well as future challenges, in order to provide a basis for an international comparison of the status of regional finance. Next, the Japan Finance Corporation for Small and Medium Enterprise explained the role of government-affiliated financial institutions in regional finance and finance for SMEs in Japan and initiatives implemented in recent years, such as securitization schemes. In addition, regional companies reported on the current status of relationship-based banking as assessed from the viewpoint of borrowers.

Issues taken up in the free discussions held after these reports included the need to share information concerning the results of initiatives related to relationship-based banking, such as an increase in loans that avoid excessive reliance on real estate as collateral by using movable assets (inventories) as collateral, and a database of successful examples of corporate rehabilitation leading to regional revitalization.

Session 2: Experience and current status of regional finance in Germany

The regional economies in Germany are said to have been successfully revitalized due to regional financing activities. In order to allow the participants in this session to explore the lessons that Japan may learn from regional finance in Germany, the savings and finance group of Deutsche Bank reported on the current status of regional finance and finance for SMEs in Germany and future challenges, and discussions were conducted based on the report. Savings banks in Germany are similar to regional financial institutions in Japan, in that they are non-profit institutions providing loans mainly to SMEs in their regions. Meanwhile, the total amount of assets held by savings banks in Germany as a group is well above the amount of a major financial institution in the United States or Europe, allowing them to exert great influence.

It was pointed out that German savings banks as a group can compete with major financial institutions despite their focus on regional finance and finance for SMEs, mainly because individual regions in Germany have traditionally had unique features of their own. Differences between the characteristics of regions and borrowers in Germany and in Japan were also cited, such as German SMEs' high degree of independence compared with their Japanese counterparts.

Session 3: Experience and current status of regional finance in Asia

In Asia, loans to SMEs are increasing in Thailand and South Korea in particular, reflecting efforts to redress the financial structure of excessive reliance on loans to major companies and direct more finance toward SMEs. As the Asian economy maintains high growth, regional finance is said to be continuing to expand. This session compared the status of regional finance in Japan and in Asia, after reports were made by representatives from Thailand and South Korea.

First, the Small and Medium Enterprise Development Bank of Thailand explained the background of its foundation and its role, as well as the current status of its activities and future challenges. Commercial banks in Thailand used to be reluctant to provide loans to SMEs, meaning that SMEs tended to turn to a non-institutionalized financial market with high interest rates as a source of funds. In light of this situation, the Small and Medium Enterprise Development Bank of Thailand was founded in 2002 in order to achieve sustainable economic growth by enhancing the competitiveness of SMEs.

Initiatives so far implemented in relation to regional finance include a "one village, one product loan" scheme. The paradigm shift in the role of the development bank from a financial institution for SMEs to an agency charged with realizing an entrepreneurship-oriented society was cited as a future challenge.

Next, the Industrial Bank of Korea explained the background of its foundation and its role, as well as the current status of its activities and future challenges. The Industrial Bank of Korea, which was founded in 1961 in order to support SMEs, is now the only governmental financial institution specializing in financing for SMEs. In South Korea, the Bank of Korea (central bank) has been facilitating fund-raising by SMEs through the operation of an SME promotion fund and other policy financing measures, while measures have also been taken to enhance the credit guarantee system and improve SMEs' access to funds. With regard to future challenges, it was pointed out that there is concern that the government's excessive involvement in financing for SMEs may create moral hazard for borrower companies.

Following the reports on Thailand and South Korea, the Bank of Yokohama reported on the initiatives of Japanese regional financial institutions for relationship-based banking. Techniques for evaluating and managing inventories of frozen tuna were explained, with regard to a loan program using movable assets as collateral. Moreover, it was reported that initiatives for relationship-based banking have produced significant results, such as the development of a loan program for new business start-ups and an increase in the number of business matching deals concluded. How to foster bankers capable of making appropriate judgments in relevant fields was cited as a future challenge.

Session 4: Challenges going forward (Panel Discussion)

First, the FSA reported on recent developments related to regional finance. According to the report, the action program for relationship-based banking implemented in fiscal 2003 and 2004 has produced steady results, while as a future challenge, it will be necessary to adopt the approach of "selection and concentration" with a view to enhancing profitability. Next, Fukuoka Bank reported on unique cases of initiatives for relationship-based banking. Initiatives regarding traditional commercial banking operations included the database of the characteristics of business sectors and industries and face-to-face sales activities with high value added, while initiatives regarding new types of activity included the use of investment funds for corporate rehabilitation and contributions to local communities.

After these reports, participants, including the people who made the reports, held a panel discussion on what the desirable status of regional finance and finance for SMEs will be. It was pointed out that, in light of the current conditions of regions and SMEs, it is not desirable for financial institutions to rely excessively on loan collateral, whether in the form of real estate or movable assets, and that it is desirable for them to enhance their screening ability regarding business profitability and give managers of failed companies a second chance to start new businesses.

Professor Naoyuki Yoshino (who concurrently serves as professor of economics at Keio University and FRTC Director) concluded the session with a summary report. The report pointed out that, since risk-taking is necessary for revitalizing regional economies and SMEs, it is not desirable that fund demand should be entirely satisfied by the single fund supply source of bank loans. The report argued that a variety of financial institutions should be placed under a financial holding company in order to make multiple fund supply schemes available, such as loans, investment trusts and funds, so that selection can be made according to the degree and type of risk involved in the relevant business project.

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The Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, which was announced in December 2007, calls for the enhancement of cooperation with overseas authorities. Specifically, the plan states that the FSA will "strengthen cooperation with supervisory authorities in rapidly growing Asian markets" and that, as part of such activities, it will "start regular discussions with supervisory and other authorities in China."

In this round of consultations, the two sides exchanged opinions about recent developments related to financial supervision in Japan and China, international developments and issues of common concern, including the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, responses to Basel II and the subprime mortgage problem. In addition, they confirmed that the two countries' financial supervisory authorities should further strengthen their cooperation.

The FSA believes that it is extremely important to strengthen cooperation with the supervisory and other authorities of China as the country's economy continues to expand rapidly, and as exchanges and cooperation between Japan and China deepen in the financial sector as well as in other fields, enhancing interdependence.

The FSA intends to continue to further promote cooperation between the authorities of the two countries through regular consultations and other means of exchange and communication.

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The FSA has taken necessary measures in order to further ensure the protection of policy holders, etc. in relation to the full liberalization of insurance sales by banks, etc. that was implemented on December 22, 2007, as scheduled.

I. Recent Financial and Economic Developments

1. Insurance sales by banks, etc. were gradually liberalized after April 2001, while the authorities closely examined the situation to detect any harmful effect of the liberalization.
2. After an advance liberalization (third stage) was implemented on December 22, 2005, the FSA conducted monitoring in order to examine the status of insurance solicitation by banks, etc. and verify the effectiveness of measures to prevent harmful effects, in preparation for the full liberalization of insurance sales by banks, etc.
3. As a result of the monitoring, the FSA concluded that the situation does not constitute "a case where it is necessary to protect policy holders, etc." - which is a condition for reviewing the date of the full liberalization, as specified by the Cabinet Office Ordinance for Partial Revision of the Ordinance for Enforcement of the Insurance Business Act, etc. (Cabinet Office Ordinance No. 87 of 2005), - and notified the Financial System Council to that effect. Moreover, the FSA conducted deliberations on whether to implement the full liberalization as scheduled by, for example, soliciting opinions from the parties concerned.
4. As a result of the deliberations, the FSA came to the conclusion that, although it was not necessary to further strengthen existing measures for preventing harmful effects, efforts should be made to further ensure the protection of policy holders, etc. Accordingly, the FSA decided to revise the Comprehensive Guidelines for the Supervision of Insurance Companies on December 21, 2007 and to take other necessary measures.

II. Key Points of Revision of Guideline for Supervision

• The following matters were specified as points of supervisory attention:
  1. Establishment and Maintenance of System at Banks, etc. to Ensure Responsible Sales Activity

  • (1)Appropriate Division of Work after Signing of Insurance Contracts

    • (i)Does the bank, etc. and the insurance company specify the division of work to be done after the signing of insurance contracts under a consignment contract, etc., and does the bank, etc. make the division of work clear to customers?

    • (ii)Have both the insurance company and the bank, etc. established a system necessary for undertaking their respective part of the work to be done after the signing of insurance contracts by, for example, securing sufficient staff?

  • (2)Communication of Responsibilities of Banks, etc. and Other Necessary Matters

  • Has the bank, etc. taken necessary measures to communicate the contents of its guideline for insurance solicitation to all customers, such as providing written explanations to customers and posting a notice of the guideline at sales branches?

  2. Establishment and Maintenance of System for Utilization of Customer Information

     As a way of ensuring the effectiveness of the requirement for customers' prior consent regarding the use of non-public financial information, has the bank, etc. taken necessary measures to prevent agency or mediation activities from being conducted for the purpose of signing insurance contracts without customers' prior consent?

  3. Establishment and Maintenance of System for Compliance with Laws and Regulations by Banks, etc.

  • (1)Requirement for Appointment of Manager in Charge of Compliance with Laws and Regulations, etc.

    As a way of securing the implementation of procedures to ensure compliance with laws and regulations related to insurance solicitation, has the bank, etc. appointed persons with sufficient knowledge of laws and regulations related to insurance solicitation and contracts to the posts of manager and supervisory manager in charge of ensuring compliance?

  • (2)Establishment of System for Internal Control Audits

    Has the bank, etc. assigned persons with sufficient knowledge of laws and regulations related to insurance solicitation and contracts to the division in charge of implementing internal audits regarding insurance solicitation, so as to ensure the appropriate implementation of such audits?

  • (3)Consideration of Guideline Set by Fair Trade Commission

    Do the business operations of the bank, etc. pay sufficient attention to the relevant guideline established by the Fair Trade Commission (Guidelines for Unfair Trade Practices Associated with Relaxation of Controls over Classification of Business, Categories and Expansion of Scope of Business for Financial Institutions), in order to avoid using unfair practices in conducting insurance solicitation activity?

III. Key Points of Revisions of Relevant Cabinet Office Ordinances, etc.

The FSA reviewed and revised technicalities of the relevant Cabinet Office Ordinances, etc. as follows, in order to facilitate the implementation of the full liberalization:

• ΟReview and revision of the insurance benefit calculation method related to a special provision for small and medium-size insurance companies regarding third-sector insurance, such as medical and cancer insurance.

• ΟAbolition of restrictions on the scope of products that may be handled by subsidiaries of banks, etc.

IV. Effective Date

December 22, 2007

V. Others

• ΟThe FSA intends to continue monitoring of insurance sales by banks, etc. after the implementation of the full liberalization, in order to prevent any harmful effect of liberalization from the viewpoint of protecting policy holders, etc.

• ΟIn addition, the FSA intends to conduct supervision with regard to the system for ensuring compliance with laws and regulations in insurance sales by banks, etc., with due consideration of the purpose of the revision of the guideline for supervision. When a problem is detected, the FSA will take strict action as necessary.

• ΟUnder its supervisory policy as described above, the FSA has not only asked individual insurance companies to establish a system that ensures appropriate solicitation when insurance sales are consigned to banks, etc., but also requested the relevant business organizations (associations of insurance companies, banks, etc.) to ensure that their member companies conduct insurance solicitation in an appropriate manner.

• ΟThe FSA will review, roughly three years from now, the necessary matters with regard to measures for preventing the harmful effects of liberalization, based on the results of future monitoring, with a view to protecting policy holders, etc. and improving convenience for users.

V. Conclusion

The FSA hopes that the full liberalization of insurance sales by banks, etc. will improve convenience for customers by making a wide selection of insurance products available to them through a variety of sales channels. Moreover, the FSA wants insurance companies and banks, etc. to conduct insurance solicitation in an appropriate manner while continuing to bear in mind the need to prevent the harmful effects of liberalization, with due consideration of the relevant laws and regulations, including the above-described partial revision of the guidance for supervision.

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Background

Improvement of the integrated legal framework for securities settlement that covers various types of securities has been implemented since June 2001, in order to reduce the risks and costs related to securities settlement and to establish a securities settlement system that is convenient for users and contributes to strengthening the international competitiveness of Japan's securities markets.

As the first step, the Act on Transfer of Short-Term Bonds, etc. was established in June 2001 (and put into force in April 2002) in order to apply the central depository system to short-term bonds (commercial paper), thus realizing "paperless" transactions for such bonds. In June 2002, the Act on Transfer of Short-Term Bonds, etc. was revised as the Act on Transfer of Bonds, etc. and the Act on Establishment of Acts Related to the Improvement of the Securities Market through Reform of the Securities Settlement System, etc. (Securities Market Improvement Act) was enacted in order to apply the central depository system to corporate and government bonds and investment trust beneficiary rights. Furthermore, in June 2004, the Act on Transfer of Bonds, etc. Transfer Act was revised as the Act on Transfer of Bonds, Stocks, etc. and the Act for Partial amendment of the Act on Transfer of Bonds, etc. for the Purpose of Rationalizing Settlement Related to Transactions of Stocks, etc. (Stock Settlement Rationalization Act) was enacted in order to apply the central depository system to stocks, etc., too.

To follow up on the above, on December 14, 2007 the government promulgated Cabinet Orders and Ordinances concerning the Securities Market Improvement Act that specify the details of procedures and arrangements for paperless transactions (e.g. Cabinet Order for Establishment of Relevant Cabinet Orders Following Enforcement of the Act on Establishment of Acts Related to the Improvement of the Securities Market through Reform of the Securities Settlement System, etc. and the Ordinace for Partial Amendment of the Ordinance for Enforcement of the Bond, etc. Registry Act) and a Cabinet Order and Cabinet Office Ordinance related to the Stock. Settlement Rationalization Act (the Cabinet Order for Partial Amendment of the Cabinet Order for Enforcement of the Act on Transfer of Bonds, etc. and the Ordinance for Partial Amendment of the Ordinance Concerning Transfer of Bonds, etc.).]

The contents of these Cabinet Orders and Ordinances are explained below.

Contents

1. The Cabinet Order for the Establishment of Relevant Cabinet Orders Following Enforcement of the Act on Establishment of Acts Related to the Improvement of the Securities Market through Reform of the Securities Settlement System, etc. and the Ordinance for Partial Amendment of the Ordinance for Enforcement of the Bonds, etc.

• (1)Key Points

  The above orders stipulate that:

  • (i)In accordance with the Securities Market Improvement Act, the Act on Registry of Bonds, etc. shall be abolished on January 4, 2008 (which means that all transfers of rights to bonds shall be implemented through the central depository system), and beneficiary certificates of exchange traded funds shall shift to the central depository system, starting on the same date.

  • (ii)The registry book of bonds, etc. whose registration under the Act on Registry of Bonds, etc., was cancelled as a result of the shift to the central depository system may be stored on microfilm.

• (2)Effective Date

  The provisions described in (i) were put into force on January 4, 2008 and the provision described in (ii) was put into force on December 14, 2007.

2. Cabinet Order for Partial Amendment of the Cabinet Order for Enforcement of the Act on Transfer of Bonds, etc. and the Ordinance for Partial Amendment of the Ordinance Concerning Transfer of Bonds, etc.

• (1)Key Points

  • (i)The above orders set forth the following additional cases in which a person who holds shares registered in a special account opened in the name of another person may become the nominee of the shares after the shift to a paperless system:

    • *When a document certifying inheritance is submitted.

    • *When a stock certificate or a certificate of stock acquisition is submitted within one year from the date of the shift to a paperless system.

  • (ii)The above orders stipulate that a shareholder may exercise the rights of a minority shareholder, such as the right to present a proposal, during the two-week period from the date when the central depository organization notifies the issuer of the number of shares, etc. recorded on the transfer account registry, upon receipt of the shareholder's request.

  • (iii)The above orders stipulate that, in addition to the nominee of a share, the issuer and an heir/heiress to the nominee may request a certificate of the matters recorded on the transfer account registry.

  • (iv)The above orders stipulate that when a shareholder of an issuing company regarding which there is a foreign ownership restriction, such as a broadcasting company, is a foreigner, the central depository organization shall notify the company to that effect in order to ensure that the company is aware of foreign ownership.

• (2)Effective Date

  The above orders shall be put into force on the effective date of the Stock Settlement Rationalization Act (a date (*) that is set by a Cabinet Order and that is not later than five years from the promulgation date (June 9, 2004) of the Stock Settlement Rationalization Act). (*) Preferably in January 2009

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