Senior Vice Minister Tanimoto (left) and Parliamentary Secretary Uno speaking at the Meeting of Director-Generals of Local Finance Bureaus (January 29)
On January 14, 2009, the Second Subcommittee of the Sectional Committee on the Financial System of the Financial System Council (chaired by Professor Shinsaku Iwahara, School of Legal and Political Studies, University of Tokyo Graduate Schools for Law and Politics) published its report titled "System Development Concerning Fund Settlements-Promoting Innovation and Protecting Users."
The payment and settlement system is a vital infrastructure that supports financial and capital markets but needs greater improvements in security, efficiency and convenience to boost the competitiveness of Japan's financial and capital markets. In the Better Market Initiative (Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets) announced in December 2007, one of the goals is the "construction of secure, efficient and convenient payment and settlement systems."
The Settlement Working Group (Settlement WG), which was formed under the Second Subcommittee of the Sectional Committee on Financial System, met 12 times from May to December last year to examine retail payments from an expert perspective. The Working Group deliberated on the creation of a regulatory framework that is balanced in terms of promoting innovation and protecting users, while assuring the security of the financial settlement system vis-à-vis the state of dissemination and development of new services with advances in data communication technologies and spread of the Internet.
Also, the 2nd Subcommittee discussed the creation of a regulatory framework for inter-bank fund settlements for strengthening the payments and settlements system.
In the report submitted by the Settlements WG, a variety of opinions were presented on issues which are difficult to share a common understanding, such as a purchase point service, an agency payment service and a cash-on-delivery (C.O.D.) service.. However, the report concluded that it is not necessary to take immediately action on the development of regulatory frameworks for these schemes and that they should be perceived as issues to be addressed in the future. Furthermore, the report recommends continued monitoring of these schemes so as to prevent any developments that would undermine user protection.
Based on the recommendations of the report, the Financial Services Agency (FSA) plans to take swift action on the development of the necessary frameworks.
Organization of the Financial System Council
Summary of the Report
1. Retail payments & settlements
Regarding matters for which a common awareness of the issues was confirmed in the Settlement WG report, it was agreed that further studies into practical implementation and action on the construction of frameworks are appropriate.
- Prepayment measures
- Treatment of "server-type" prepayment measures should be similar to that for IC-type prepayment measures
- Oversight rules will be developed for custom types
- The current framework requiring notification for custom types and registration for third-party type will be kept in place.
- Regarding ways of protecting deposits issued as prepayment, protection methods that are bankruptcy remote, such as the use of trusts, will be reviewed, in addition to studies into deposits and guarantees made by banks and other financial institutions.
- Cashing and refunding will be prohibited as a general rule, but with cashing and/or refunding made obligatory in case of termination of service by the service provider.
- Fund transfer service (tentative name)
- Non-banking entities will be allowed to engage in "exchange transactions" not involving acceptance of deposits or fund management of loans, etc. (greater versatility in the system related to "exchange transactions")
- User protection must be secured in case of the bankruptcy of a fund transfer business operator, minimizing its impact on society and the economy.
- Funds held by the business operators must be guaranteed in full.
- Regarding protection of funds held by fund transfer business operators, entrustment to trust banks will be authorized along with deposits and guarantees to banks and other financial institutions, while promoting bankruptcy remoteness.
- The Act on Prevention of Transfer of Criminal Proceeds must be applied to fund transfer business operators
2. Inter-bank payment
It is necessary to develop a regulatory framework neccesary for inter-bank payments based on securities settlement systems in various countries.
The FSA has been engaged in an initiative to improve the quality of financial regulation (Better Regulation) since the summer of 2007. The state of progress in the Better Regulation initiative, mainly concerning action taken from July 2007 to April 2008, was published in the first report issued in May 2008.
The second report dated December 26, 2008, outlines the status of progress for the period from May to December 2008.
The Initiative toward Better Regulation consists of the following four major pillars of action:
1. Optimal combination of rules-based and principles-based supervisory approaches
2. Timely recognition of priority issues and effective response
3. Encouraging voluntary efforts by financial institutions and placing greater emphasis on providing them with incentives
4. Improving the transparency and predictability of regulatory actions
The progress made in these four areas is reported as follows.
The progress made in the five areas of immediate focus, aimed at realization of the four pillars, is outlined below.
The first progress report on efforts toward Better Regulation also highlighted tasks to be tackled in the future - namely (1) efforts to better acquaint FSA employees with the concept of Better Regulation, (2) enhancement of working-level dialogue and (3) expansion of opportunities for disseminating information. The status of the progress in these areas is outlined below.
(1) Efforts to better acquaint FSA employees with the concept of Better Regulation
- Five items that are particularly important in improving the quality of the conduct of inspections were specified in FSA Inspection Manuals, and efforts were made to ensure that all inspectors are acquainted with the items and act accordingly. Supervisory departments held training programs intended to ensure that all supervisors are fully acquainted with the aforesaid principles and act accordingly.
- Continued efforts will be made to further ensure that FSA employees are acquainted with the concept of Better Regulation and act accordingly.
(2) Enhancement of working-level dialogue
- Dialogue was enhanced by an increase in the frequency of hearings regarding the financial results of financial institutions and an extensive exchange of information conducted by the newly established Office for Supervisory Policy, Financial Market & Risk Analysis with working-level officials of financial institutions about the institutions’ conditions.
- In the future, the FSA needs to deepen discussions with financial institutions about the Principles, through its dialogue with them, and improve the predictability of regulatory actions by enhancing its framework for hearings held to identify financial institutions’ queries regarding the interpretations of laws and regulations.
(3) Expansion of opportunities for disseminating information
- A variety of speeches has been delivered by the Minister of State for Financial Services, the FSA Commissioner and senior FSA officials (frequently delivered in English). Efforts have also been directed to enhance the content of the FSA website, including revisions in the design of its home page.
- Continued efforts will be made to expand opportunities for disseminating information.
* For further details, access Progress Status of Initiative toward Better Regulation (from May 2008 to December 2008) (December 26, 2008) under “Press Releases” in the FSA website.
On December 12, 2008, the European Commission (EC) of the European Union (EU) announced the conclusion of its equivalence assessments of third-country accounting standards and also its recognition of Japanese GAAP equivalence to the International Financial Reporting Standards (IFRS) adopted in Europe. The following directive and decision were also published in the EU official bulletin dated December 19, 2008. The approval has allowed Japanese businesses listed on the EU market to maintain their status, with financial reporting in accordance with Japanese GAAP.
- Commission Regulation (EC) No. 1289/2008 amending Commission Regulation (EC) No. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council
- Commission decision on the use by third countries’ issuers of securities of certain third country’s national accounting standards and International Financial Reporting Standards to prepare their consolidated financial statements
* The EU official journal is available from EC News section of the European Commission website.
The Background and Developments in Equivalence Assessment
As part of EU’s Lisbon Strategy for Growth and Jobs (March 2000), the Regulation on the application of international accounting standards (IAS1) was adopted in July 2002, followed by the Regulation on the application of all international accounting standards in existence on 14 September 2002 except IAS 32, IAS 39 and related interpretations in September 2003 and the Regulation on the application of all IAS in existence on 14 September 2002 starting in 2005. Furthermore, the Prospectuses Directive (July 2003) regarding disclosure on issue and the Transparency Directive (December 2004) for continuing disclosure have been adopted. These two directives require non-EU issuers whose securities are admitted to trading in the regulated markets within the EU to comply with IFRS or equivalent accounting standards starting in January 2007. As a result, Japanese GAAP came under study for equivalence assessment.
Note: This issue was originally called the "2005 problem" when application of IAS became compulsory in the EU. Although January 2007 was set as deadline for non-EU foreign businesses, it was called the "2007 problem" and later the "2009 problem" with extension of equivalence assessment by two more years (to be described later).
Actual equivalence assessment started with the assignment of the Committee of European Securities Regulators (CESR) by EC in June 2004 to provide technical advice on assessment of GAAPs of Japan, the US and Canada.
In July 2005, CESR issued the CESR final technical advice (Ref. No. 05-230b) to the European Commission, in which Japanese GAAP was found to be "taken as a whole, equivalent to" IFRS adopted in Europe but to have "26 significant differences." with which remedies such as additional disclosures are necessary.
1 The International Accounting Standards Committee (IASC) was reorganized as the International Accounting Standards Board (IASB), with the accounting standards to be established renamed from IAS to IFRS.
In the meantime, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) had worked for discussions on convergence between IFRS and US GAAP since the Norwalk Agreement of September 2002. Subsequently, the February 2006 Memorandum of Understanding (MOU) on the convergence plan was concluded. In Japan, the Accounting Standards Board of Japan (ASBJ) also took steps to accelerate international convergence and began deliberations on convergence with IASB in March 2005 and with US FASB in May 2006.
On the securities regulators’ side, in April 2005 the US Securities and Exchange Commission (SEC) unveiled a roadmap toward elimination of the US GAAP reconciliation requirement imposed on financial statements based on IFRS by 2009. Later, in 2006, the European Commission proposed the postponement of the January 2007 deadline for non-EU foreign businesses to adopt IFRS or equivalent accounting standards to January 2009, in view of advances made in international convergence.
In face of these developments, Japanese constituents engaged in discussions on convergence at the Planning and Coordination Committee of the Business Accounting Council (BAC) and issued the statement titled "Towards the International Convergence of Accounting Standards." The statement called for Japan to take proactive efforts on convergence of the standards and for all related parties to work in concert for establishment and reinforcement of a system for mutual cooperation.
Based on this opinion, ASBJ developed and published a project plan for eliminating the 26 items identified as significant differences by CESR. Later, a deadline for eliminating significant differences was set for the end of 2008 (by June 30, 2011 for other differences) in the Tokyo Agreement of August 2007.
Concurrently, the FSA has engaged in a variety of dialogues with foreign regulators and in information-sharing with the relevant parties in Japan, such as regular meetings with the European Commission, active dialogue with CESR, as well as the publication of opinions on the dialogues and interactions with members of the European Parliament through Japan’s diplomatic missions.
With subsequent advances in international convergence and the elimination by the SEC of the US GAAP reconciliation requirement for financial statements of foreign businesses based on IFRS, CESR switched from an approach focused on differences between accounting standards at a certain period of time to a holistic approach by conducting assessment of standards as a whole, including the presence of a rational convergence program. With this change, it issued technical advice on the equivalence of Japanese GAAP and US GAAP with IFRS.
In response, the European Commission issued a draft report in April 2008 based on this technical advice, and later, on December 12, 2008, issued its final decision recognizing Japanese GAAP as equivalent to the IFRS adopted in Europe, following consultations with the European Parliament and the European Securities Committee (Commission Decision of December 2008 on the use by third countries’ issuers of securities of certain third country’s national accounting standards and International Financial Reporting Standards to prepare their consolidated financial statements).
The Conclusion and Significance of Equivalence Assessment
According to the Decision, "in August 2007 the Accounting Standards Board of Japan and the IASB announced their agreement to accelerate the convergence by eliminating major differences between Japanese GAAP and IFRS by 2008 and the remaining differences by 2011. The Japanese authorities do not require any reconciliation for Community issuers which prepare their financial statements according to IFRS. Therefore, it is appropriate to consider Japanese GAAP equivalent to adopted IFRS from 1 January 2009." A similar decision has also been made for US GAAP. For GAAP of the People's Republic of China, Canada, the Republic of Korea and the Republic of India, a third country issuer is to be permitted to prepare its consolidated financial statements in accordance with the respective GAAP for financial years prior to those starting on or after 1 January 2012, although they have not been finally decided as the equivalent in the decision.
As a direct impact of the decision, Japanese business corporations that raise funds in regulated markets within the EU are able to continue publishing their financial statements based on Japanese GAAP. The FSA evaluates this Commission Decision highly for its recognition of the outstanding quality of the Japanese GAAP, which is a key infrastructure for financial capital markets in the country, from the international perspective and for maintenance of the openness of the financial capital markets of both Japan and the European Union.
This achievement is believed to be the product of the hard work and effort of the parties involved both in Europe and in Japan mainly led by ASBJ. The FSA to continues to enhance the international credibility of the Japanese financial capital markets and to support the efforts in the area of accounting standards.
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