Japan’s Financial Services Agency Cracks Down on Unfair Business Practices

The Japanese Financial Services Agency (FSA) has been taking administrative action against financial institutions that harm customer protection and market fairness. The agency’s primary goal is to ensure transparency, predictability, and fairness in its financial supervision.

Predictive Supervision

To prevent unfair practices from arising, the FSA has implemented several measures to ensure transparency and predictability in its administrative actions:

Publishing Guidelines: The FSA publishes its supervision guidelines, outlining the agency’s inspection and supervisory perspectives, as well as the workflow for administrative actions.
No Action Letter System: Introducing a system that allows private companies to inquire about the legality of their proposed activities before launching them. Since its introduction in July 2001, the FSA has received 68 requests under this system.
Written Inquiry Procedures: Implementing written inquiry procedures for general legal interpretation, allowing business associations and individuals without specialized knowledge to inquire about general and abstract legal interpretations.

Due Process

Before taking administrative action, the FSA conducts a hearing with the financial institution concerned, in accordance with Japan’s Administrative Procedure Law. The agency also has an opinion-exchanging system, which allows financial institutions to request an exchange of opinions before the agency takes action.

Administrative Appeal and Judicial Appeal: Those affected by the FSA’s decisions have the right to appeal through administrative channels or judicial processes.

Transparency

The FSA announces all administrative actions to the public, except in cases where such announcement might hinder managerial improvement in the targeted financial institution. The agency also publishes:

Quarterly Collection of Cases: A quarterly collection of cases in which administrative action has been taken.
Disclosure of Information: Responds to many requests for disclosure of information each year under Japan’s Law Concerning Access to Information held by Administrative Organs.

Criteria for Administrative Action

When considering administrative action, the FSA examines several factors:

Seriousness and Maliciousness of Conduct: The agency assesses the seriousness and maliciousness of the conduct in question.
Governance Systems and Operational Control Systems: Examines the appropriateness of governance systems and operational control systems that caused or contributed to the violation.
Mitigating Factors: Considers mitigating factors, such as whether the financial institution is making voluntary efforts to protect customers.

Checking Framework

The FSA has established:

Independent Office and Desk: An independent office and desk to investigate compliance and ensure fairness in its administrative actions.
Precedent Review: Carefully reviews precedents and conducts checks in multiple sections to ensure that its decisions are fair and reasonable.

Follow-Up

The principal objective of taking administrative action is to ensure financial soundness and operational appropriateness of the financial institutions. The FSA:

Requires Business Improvement Plans: Requires financial institutions to submit business improvement plans as a condition of administrative action.
Focuses on Improvement Efforts: Focuses on encouraging and following up on their efforts to improve their governance, risk management, and compliance systems.

By taking a proactive approach to supervising the financial sector, the FSA aims to promote transparency, fairness, and stability in Japan’s financial markets.