[Explanations of Laws and Regulations]
Results of the Public Comments procedure on the Proposed Cabinet Order and Proposed Cabinet Office Ordinance on the Revamp of Firewall Regulations and the Establishment of Systems for Managing Conflicts of Interest in the 2008 Amendment of the Financial Exchange and Instruments Act
The firewall regulations separating securities, banking and insurance businesses are aimed at preventing harm causal by conflicts of interest and curbing abuse of the dominant position of banks. However, the existing firewall regulations have been found to involve the following in shortcomings in the face of the face of advances in conglomeration of financial institutions:
- Possible obstruction of user convenience, impeding delivery of comprehensive service as a financial group ; and
- Possible obstruction of integrated risk management and compliance required for the financial group as a whole.
The First Subcommittee of the Sectional Committee on the Financial System of the Financial System Council that in the fall of 2007 also engaged in lively discussion on the existing firewall regulations, from the standpoints of effectively preventing abuse of their dominant positions by banks and other financial institutions as well as conflicts of interest, and of satisfying the need for integrated internal control of financial groups and improving customer convenience. The Subcommittee concluded its deliberations with the recommendation that a new framework founded on the regulations described below should be put in place.
- A framework should be developed under which financial institutions are required to establish systems for managing conflicts of interest.
- Solicitation with the abusive use of the dominant positions of banks, etc. should be prohibited.
- The ban on concurrent executive officers and employees should be abolished
- The restrictions on the sharing of non-public information regarding clients and customers should be reviewed.
"The act for Amendment of the Financial Instruments and Exchange Act, etc." (hereinafter referred to as the "Amendment") promulgated on June 13, 2008, abolished the ban on concurrent posts held by senior officers and employees within a financial group and required financial institutions and financial groups to establish systems for managing conflicts of interest, based on the recommendations of the Financial System Council.
Reflecting the Amendment, the recently promulgated Cabinet Order and Cabinet Office Ordinance implemented the following:
- Provisions on the details of how to establish the systems for managing conflicts of interest
- Review of the restrictions on the sharing of non-public information regarding customers
- Provisions on prevention of the abuse of the dominant positions of banks, etc.
- Mitigation of restrictions on lead underwriters
The main changes are described below.
2. Provisions on the details of how to establish the systems for managing conflicts of interest
The Amendment requires securities firms, banks, insurance companies and others to implement proper information management and develop appropriate internal control frameworks aimed at preventing customers' interests from being unfairly harmed in association with trading by the firm itself or by a group company.
In the recently amended Cabinet Order and Cabinet Office Ordinance, rules have been established on details such as the scope of business operators and group companies that are required to establish systems for managing conflicts of interest. Along with this, they specify measures business operators must execute to prevent customers' interests from being unfairly harmed.
3. Review of the restrictions on the sharing of non-public information regarding customers
Regarding the sharing of corporate customer information within a financial group, advance consent of the customer is no longer necessary, but this sharing is restricted when the customer does not consent (opt-out consent).
Note: Sharing of non-public information on individual customers will continue to require opt-in consent of the customer.
Advance approval of the FSA that is presently required for information sharing for the purpose of integrated internal management will no longer be necessary.
4. Prevention of the abuse of the dominant positions of banks, etc.
Measures will be implemented to prevent securities firms and insurance companies from solicitation and conclusion of financial product transactions or insurance contracts by unfairly abusing their dominant positions as the banks within the same corporate group.
Note: Under the Banking Act, banks are already prohibited from taking advantage of their dominant positions in business to have the group companies engage in transactions.
5. Mitigation of restrictions on lead underwriters
As a basic rule, a securities firm cannot be assigned as lead underwriter for securities issued by a corporate group member. An exception to this rule has been added in the case of involvement of other underwriters that satisfy the following requirements in the stock issue valuation process.
(1) Being registered as an underwriter;
(2)Having extensive experience in underwriting; and
(3) Being independent in terms of capital and personnel.
The relationship between the issuer and the lead underwriter, as well as details of the issue valuation method and procedure, must be disclosed by including the information in the security registration statement.
6. Effective date
The amendments regarding the revamp of firewall regulations and establishment of systems for managing conflicts of interest were scheduled to come into effect on a date specified by a Cabinet Order, within one year from the date of promulgation of the amendments (June 13, 2008), and they are to be enforced from June 1, 2009, by promulgation of the related Cabinet Order.
This section provides information regarding the hot topics of the moment, selected from questions and answers given at the Minister's press conferences, etc. If you wish to find out more, we invite you to visit the "Press Conferences" section of the FSA website.
Q:Today, the first trading day of the year, the TSE (Tokyo Stock Exchange) made a good start as stock prices (as measured by the Nikkei Average) rebounded to 9,000. How do you feel about this? Also, following the largest annual stock price drop ever that was recorded last year, how would you like the stock market to perform this year?
A: If I remember correctly, despite a difficult environment early last year, many people said that the stock market would recover later in the year, while some experts and market participants now predict that this will be a very difficult year. In this situation, countries around the world are implementing a variety of measures on their own and in cooperation with each other. In Japan, too, the government and the private sector must work together and do their best to overcome this crisis situation. In this sense, stable foreign exchange rates and the stock price rise today, which came after a moderate recovery in markets around the world around the turn of the year, reflect the strong resolve of the private sector, or the business circles, to overcome this difficult situation, and we must also do our best to accomplish what must be done with a similar resolve. For the moment, I feel as if we are being encouraged by the market to cheer up. That is my impression of the current market conditions.
[Extract from the press conference on January 5, 2009]
Q:First, Sapporo Hokuyo Holdings, which is based in Hokkaido, announced yesterday that it started considering applying for governmental capital injection under the revised Act on Special Measures for Strengthening Financial Functions. While the screening has yet to be done, it will be the first case of capital injection under this Act if the application is approved. What do you think of this?
A: I know of the announcement yesterday that Hokuyo Bank started considering accepting governmental capital injection. I think it is very good for the local economy for a sound bank to provide funds to SMEs in Hokkaido by strengthening its capital base. So, if I am to speak in general terms, rather than talking about a specific bank, I hope that the recapitalization scheme will be used to achieve the purpose of this Act.
Q:How do you expect this will affect other financial institutions?
A: In the past, there was a similar case, although the purpose at that time was quite different, and some people worried that this scheme could have negative effects. However, I hope that this will prompt other financial institutions to use this scheme, as its use by sound banks would lead to the fulfillment of their duty to exercise their financial functions.
[Extract from the press conference on January 5, 2009]
Q:I would like to ask you about applications for public funds based on the Act on Special Measures for Strengthening Financial Functions. What do you think of Minami Nippon Bank's recent expression of their intention to consider filing an application? Also, while I think that other regional banks may file their own applications as, to a certain degree, drops in stock prices and the (severe) condition of the local economies are problems that are common in the industry, how do you view the current situation?
A: As for the Act on Special Measures for Strengthening Financial Functions, as I have said over and over again, its purpose is to strengthen the foundation of financial institutions and encourage them to provide funds to small and medium-size enterprises and local economies, and financial institutions should make their own judgments and apply for injections of public funds based on that. The announcements by Hokuyo Bank and Minami Nippon Bank that they will consider applying are in accordance with the purpose of this Act. In particular, I would greatly appreciate it if applications were filed in regions such as Hokkaido and Kagoshima, where the economic condition is very severe, so that funds could be provided smoothly there, and I would also appreciate it if applications were filed in other regions or by other financial institutions.
[Extract from the press conference on January 23, 2009]
Q:In relation to financial affairs, I would like to ask you about the current situation of regional banks. I understand that so far, two banks have expressed their intentions to apply for capital injection under the Act on Special Measures for Strengthening Financial Functions. In addition, Kagawa Bank and Tokushima Bank announced their business integration yesterday. What is your recognition of the environment surrounding regional banks and their management conditions?
A: Before I talk about the merger, I would like to tell you about my view about news that umbrella organizations for "shinkin" banks and credit associations are considering applying for governmental capital injection. As I have been saying, liquidity problems faced by financial institutions around the world are affecting the real economy considerably. Therefore, while I would not tell them whether or not to do this, in light of the purpose of this act, it would be very good if they decided to. I would welcome it. As I told you earlier, I could not say whether or not this should be done, nor have I received any formal report about this. However, generally speaking, I think this is also good from the viewpoint of the provision of liquidity to small and medium-size enterprises (SMEs).
As for the merger plan of the banks in the Shikoku region that you mentioned, I do not know anything more than has been reported by the mass media. Previously, I think that one of the major objectives of the Act on Special Measures for Strengthening Financial Functions was to promote mergers. However, this time, rather than promoting mergers, it is intended to give banks the additional capacity and sufficient financial strength to provide loans to SMEs and local economies. So, while promoting merger is not a major direct objective, we will keep a close watch on this because banks' financial strength may be enhanced by a merger, although I do not know how this merger plan will play out.
[Extract from the press conference on January 23, 2009]
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