Banks Face Scrutiny Over Remuneration Practices

A new report has raised concerns over the remuneration practices of banks in Japan, highlighting the need for greater transparency and accountability.

Remuneration System Concerns

According to the report, a bank’s remuneration system should not drive excessive risk-taking by directors, executive officers, or employees. The remuneration committee of a bank must supervise the bank’s remuneration system to ensure that it is appropriately established and managed.

• The committee should consider whether the amount of remuneration would have a material effect on the bank’s core capital.
• They should also communicate with the risk monitoring department of the bank and check whether the remuneration system causes excessive short-termism or becomes excessively performance-based.

Remuneration for Risk Monitoring Department and Compliance Department

In addition, the report notes that the remuneration of staff in the risk monitoring department and compliance department should be determined independently from other business departments and based on the importance of their roles.

AML/KYC Regulations

The Financial Services Agency (FSA) has outlined the key regulations governing anti-money laundering and counter-terrorism financing (AML/CFT).

Key Regulations

• Under the Act on Prevention of Transfer of Criminal Proceeds, financial institutions, including banks, are required to:
  • Implement customer due diligence, record-keeping, and reporting of suspicious transactions.
  • Verify identification data, such as name, address, and date of birth, as well as the purpose and intended nature of the transaction.
  • Prepare and preserve verification records for seven years from the date of the transaction.

Depositor Protection

The Deposit Insurance Corporation (DIC) administers Japan’s deposit insurance system, which provides financial assistance to successor financial institutions and thereby indirectly makes insurance proceeds available to depositors.

System Overview

• The system protects depositors by providing financial assistance to a successor financial institution or directly paying insurance proceeds to depositors of a failed financial institution.
• Only those with insured deposits with insured financial institutions are protected under the system, up to the statutory limit if applicable. Banks and other deposit-taking financial institutions licensed in Japan are insured under the deposit insurance system, with some exceptions.

Future Monitoring

The FSA will continue to monitor banks’ remuneration practices and AML/CFT regulations to ensure compliance with regulatory requirements. Failure to comply may result in administrative action, such as issuing an order for business improvement. In cases where a serious problem is recognized, the FSA may take more severe measures, including requiring the bank to submit a report under Article 24 of the Banking Act or issuing an order under Article 26 of the same act.