Financial Crime World

Financial Institutions’ Risk-Based Approach Lacking, JFSA Finds

The Japanese Financial Services Agency (JFSA) has identified several deficiencies in the risk management practices of financial institutions in Japan. In its latest report, the agency noted that many firms are taking a check-the-box approach to compliance, focusing on ticking off regulatory requirements rather than implementing a genuinely risk-based approach.

Consequences of Lack of Risk-Based Approach

According to JFSA, this lack of a risk-based approach is leading to several negative consequences. For example:

  • Financial institutions may impose excessive burdens on themselves, diverting resources away from more critical management issues.
  • Firms may not adequately identify and manage risks, exposing them to potential losses.

Importance of Proactive Risk Management

The report also highlighted the importance of a proactive approach to risk management. JFSA emphasized that financial institutions must be able to:

  • Identify and respond to emerging risks in a timely manner
  • React to events after they have occurred

New Guidelines for Financial Institutions

To address these issues, JFSA is introducing new guidelines for financial institutions, which will require them to adopt a more risk-based approach to compliance. The agency is also increasing its monitoring and supervision of financial institutions, with a focus on identifying and addressing potential risks.

JFSA’s Supervisory Approach

JFSA has outlined several key procedures for monitoring compliance risks:

  • Wide- ranging intelligence gathering: Gather information from a wide range of sources, including interviews with management and employees, documents submitted by financial institutions, and news reports.
  • Setting monitoring issues: Analyze the risks faced by each financial institution and set monitoring issues based on its findings.
  • Strategy development and monitoring: Work with financial institutions to develop strategies for managing compliance risks and monitor their progress over time.

Conclusion

JFSA’s report highlights the importance of a risk-based approach to compliance in the Japanese financial sector. By adopting this approach, financial institutions can better identify and manage potential risks, which can help ensure the stability and integrity of the financial system as a whole.