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Compliance Risks Loom Large for Japan’s Banking Sector

A recent report by Japan’s Financial Services Agency (JFSA) has highlighted the pressing need for financial institutions to enhance their compliance risk management. The agency’s “Outline of Trends and Issues in Compliance Risk Management” reveals a plethora of issues that threaten the stability of the country’s banking sector.

Corporate Culture: A Key Concern

One of the primary concerns is the lack of a robust corporate culture that promotes compliance. Many financial institutions struggle to instill their management’s message throughout all levels of the organization, leading to a lack of genuine understanding and implementation among employees.

Internal Control: A Shared Responsibility

Middle- level managers are expected to take ownership of compliance risk management, but progress is slow due to inadequate incentives and dysfunctional whistleblowing systems. The report warns that these issues can lead to major compliance breaches.

Governance: A Key to Effective Risk Management

The JFSA emphasizes the importance of effective governance in managing compliance risks. Financial institutions are advised to engage with external directors, retirees, outside experts, and customers to foster a culture of transparency and accountability.

Risk Ownership: A Critical Factor

Only a few financial institutions have fully incorporated risk ownership at the front-line worker level, according to the report. The agency urges financial institutions to strengthen risk ownership under the leadership of management and ensure human resources and systems are in place for compliance divisions and internal audit divisions.

Group Companies and Overseas Offices: A Shared Responsibility

Financial institutions with group companies and overseas offices face unique challenges in managing compliance risks. The JFSA advises these institutions to consider the impact on consumer protection, market fairness, and transparency at each level of the organization.

Infrastructure: A Key Enabler

The report highlights the importance of strategic human resource management and information technology (IT) in enhancing compliance risk management. Financial institutions are urged to secure specialized human resources and utilize IT effectively and efficiently to manage compliance risks.

Risk-Based Approach: A Critical Component

The JFSA emphasizes the need for a risk-based approach to compliance risk management, prioritizing issues and addressing them proactively to prevent damage and increase corporate value.

A Call to Action

The report concludes that financial institutions must continue to make efforts to enhance compliance risk management to achieve higher corporate values. The JFSA has pledged to analyze actual conditions of a wider range of financial institutions, monitor those with specific issues, and disclose major findings and implications to support the sector in its quest for compliance excellence.

As Japan’s banking sector navigates these complex challenges, it is clear that effective compliance risk management will be critical to ensuring stability and trust in the financial system.