Financial Crime World

Japan’s Regulatory Structure for Financial Services Firms

Overview

Financial services firms (FIBOs) in Japan are subject to a comprehensive regulatory framework designed to protect investors, maintain fair market practices, and ensure the stability of the financial system. This framework includes various laws and regulations, such as the Financial Instruments and Exchange Act (FIEA), the Act Concerning the Sale of Financial Products (ACSFP), and others.

Key Regulations

  • Financial Instruments and Exchange Act (FIEA): Regulates the sale and trading of financial instruments, including stocks, bonds, and derivatives.
  • Act Concerning the Sale of Financial Products (ACSFP): Sets standards for the sales of financial products, including requirements for disclosure and suitability.

Gatekeepers in Japan’s Regulatory Structure

Gatekeepers play a crucial role in ensuring that FIBOs operate in compliance with applicable laws and regulations. Independent internal audit departments are established to:

  • Audit business activities
  • Assess the effectiveness of internal control functions
  • Report directly to the board of directors

Duties and Liability of Directors

Directors assume fiduciary duties, including:

  • Duty of loyalty: Act in the best interests of the company.
  • Duty of care: Exercise reasonable care and diligence when making decisions.
  • Duty of monitoring and supervision: Oversee the company’s operations and ensure compliance with laws and regulations.
  • Duty of reporting: Provide accurate and timely information to stakeholders.

Breaches of these duties can result in:

  • Criminal fines
  • Penal servitude
  • Administrative fines

Directors may be held individually accountable for violating laws and regulations.

When Are Directors Typically Held Individually Accountable?

Directors are typically held individually accountable if they:

  • Authorize falsification of accounts
  • Engage in fraudulent transactions
  • Breach their fiduciary duties

Japanese courts tend not to hold directors liable for business decisions made in accordance with industry standards and due diligence.

Private Rights of Action

Private rights of action may be available against FIBOs for violating JFSA rules, particularly if they breach the principle of suitability or fail to explain the nature of a financial product under the ACSFP. In such cases, the burden of disproving causality between violation and loss incurred by the customer lies with the FIBO.

Standard of Care for Customers

FIBOs must provide financial services in good faith, in accordance with the principle of fairness. They are required to:

  • Explain the nature of a financial product
  • Disclose risks involved
  • Provide key aspects of the transaction before selling it to a customer

The standard of care differs based on the sophistication of the customer or counterparty.

Note that this is not an exhaustive list, and you may want to add or modify sections to fit your specific needs.