Bank Remuneration Committee Must Communicate with Risk Monitoring Department: FSA
The Financial Services Agency (FSA) of Japan has issued guidelines emphasizing the importance of effective communication between a bank’s remuneration committee and its risk monitoring department. The guidelines also stress that remuneration systems should be designed to prevent excessive short-termism and performance-based compensation.
Communication Between Remuneration Committee and Risk Monitoring Department
According to the guidelines, the remuneration committee should regularly communicate with the risk monitoring department to ensure that the bank’s remuneration system is aligned with its overall risk management strategy. This includes verifying whether the remuneration system causes excessive short-termism or becomes excessively performance-based.
Independent Remuneration for Risk Monitoring and Compliance Departments
The FSA emphasized that the remuneration of staff in the risk monitoring and compliance departments should be determined independently from other business departments and based on the importance of their roles. This is to ensure that these critical functions are not compromised by conflicts of interest.
Consequences of Problematic Remuneration Systems
If a bank’s remuneration system is deemed problematic, the FSA may require the bank to submit a report under Article 24 of the Banking Act or take administrative action, including issuing an order for business improvement under Article 26 of the act.
AML/CFT Requirements
Japan has implemented new anti-money laundering (AML) and counter-terrorist financing (CFT) regulations aimed at strengthening the country’s financial system. The regulations require banks to conduct customer due diligence, maintain records of transactions, and report suspicious activities.
Key Requirements
- Verify the identity of customers who engage in specified transactions, such as cash transactions exceeding a certain threshold
- Maintain records of these transactions for seven years
- Report any suspicious activities to the authorities
Depositor Protection
Japan’s Deposit Insurance Corporation (DIC) has emphasized its commitment to protecting depositors in case of bank failures. The DIC administers the country’s deposit insurance system, which provides financial assistance or direct payment of insurance proceeds to depositors in the event of a bank failure.
Scheme for Financial Assistance
The DIC has implemented a scheme that provides financial assistance to successor financial institutions and thereby makes insurance proceeds available to depositors indirectly. This approach is more cost-effective and causes less confusion compared to direct payment of insurance proceeds.