Mr. Tomoyuki Tanaka
Partner

Tomoyuki Tanaka is a partner at Anderson Mori & Tomotsune specialising in financial regulatory issues, financing transactions and corporate transactions. He has considerable experience advising on all aspects of financial regulatory issues, including banking, securities and insurance regulations matters. He has also served on secondment in the supervisory department of the FSA, where he had regulatory oversight of various financial institutions, such as major and regional banks, foreign banks, securities companies and fintech companies.

Recent Amendments to Banking-Related Regulations in Japan

On March 5, 2021, a bill (the “Bill”) was submitted to the Diet based on the recommendations of the Financial System Council (the “Council”) of the Financial Services Agency of Japan (the “FSA”). The Bill encompasses, among others, amendments to the Banking Act and the Financial Instruments and Exchange Act (the “FIEA”), to strengthen and enhance the stability of Japan’s financial system in response to the socio-economic impact of Covid-19 and other developments. The Bill was approved by the Diet on May 19, 2021 and came into force on November 22, 2021.

Based on the recommendations of the Council, the FSA has also amended the Cabinet Office Ordinance on Financial Instruments Business (the “COOFIB”) and the supervisory guidelines in relation to firewall regulations in June 2022.

This article provides an outline of (i) the amendments to the Banking Act, (ii) the amendments to the COOFIB and the relevant supervisory guidelines published by the FSA and (iii) the resulting developments following the aforementioned amendments.

1. AMENDMENTS TO THE BANKING ACT

The Banking Act is premised upon the separation of “banking” and “commerce”. Under the Banking Act, banks are only permitted to engage in core banking activities (i.e., deposit taking, lending and funds remittance), limited businesses ancillary to banking activities, and certain securities-related businesses specified in the Banking Act. Banks are also generally prohibited from holding subsidiaries or holding more than 5% of the voting rights in domestic companies that engage in businesses other than those permitted under the Banking Act (“Restricted Entities”), except in certain limited circumstances. These limitations have been imposed on banks with the objective of, among others (1) preventing damage to the financial soundness of banks as a result of their engaging in non-banking related activities and (2) preventing banks from being conflicted between acting in the interest of customers of their core banking businesses (and depositors in particular) and the interests of customers in their other businesses.

However, given the low interest rate environment in Japan and the development of new methods of funds remittance by fintech companies, the prevalent business models of Japanese banks are expected to undergo inevitable change. Moreover, given the headwinds presented by the aging demographics in Japan, banks are expected to be at the vanguard of efforts to rehabilitate the economy and spearhead sustainable growth. In line with this, the Council’s “Banking System Working Group” undertook a review of the banking system and published a report on December 22, 2020, summarising its recommendations of measures for improving the banking system (the “Banking System Report”). The improvement measures are aimed at, among others, relaxing the scope of businesses in which banks and their subsidiaries may engage, based on recent socio-economic developments. The Bill includes amendments to the Banking Act based on the Banking System Report.

Pursuant to the amendments to the Banking Act under the Bill (the “Banking Act Amendments”), banks are permitted to engage in certain businesses relating to the digitalisation and rehabilitation of regional economies in Japan by utilising their banking-related management resources. Under the Banking Act Amendments, such businesses, which are considered ancillary to banking activities, include provision of the following services: (i) services that support the livelihood of customers; (ii) IT systems and applications originally developed by banks for internal use; (iii) data analysis, marketing and advertising services; (iv) temporary staffing services; and (v) consulting and business-matching services.

Under the Banking Act Amendments, banks are also able to more flexibly invest in domestic companies. For example, a bank may hold a subsidiary that engages in a business related to the rehabilitation of regional economies in Japan. The scope of domestic companies in which a bank may invest has been expanded into the area of venture investments and business rehabilitation projects. Such investments may be conducted through the subsidiaries of banks that are established for purposes of investing in other companies. Further, the requirements for investments in such companies have been relaxed and the permissible term for which a bank may invest in such companies has been extended to enable banks to make broader and longer-term commitments to venture investments, business rehabilitation and business succession projects.

Under the erstwhile banking regulations, banks and banking groups were permitted, with the FSA’s approval (“Investment Approval”), to hold more than 5% of voting rights in Restricted Entities if (i) the business of the Restricted Entity would or would potentially enhance the operational sophistication of the banks or (ii) the business of the investee company would enhance or would potentially enhance the convenience of customers of the relevant bank (“Complementing Companies”). This has enabled Japanese banks to obtain Investment Approvals for investments in fintech companies, such as those that have developed electronic Know Your Customer (e-KYC) or fraud detection technologies, as well as regional trading companies. The Banking Act Amendments augments this by including provisions that expand the scope of situations in which banks and banking groups may apply for Investment Approvals (including allowing investments in companies that would contribute or would potentially contribute to social sustainability) and relaxing the criteria for Investment Approval in certain circumstances. Further, banking groups certified as having sufficient financial strength and satisfactory standards of corporate governance may invest in Complementing Companies without Investment Approval. Accordingly, the Banking Act Amendments enable banks and banking groups to expand the scope of their businesses based largely on their resourcefulness and ingenuity. Following the Banking Act Amendments, Japanese banks have obtained Investment Approvals to establish various subsidiaries that engage in businesses related to renewable energy (e.g., generation and supply of renewable energy) and software engineering, among others.

The Banking Act Amendments are also designed to strengthen the international competitiveness of Japanese banks. Under previous banking regulations, banks and bank holding companies that hold foreign banks as subsidiaries are generally required to dispose of their subsidiaries within five years of acquisition if the businesses of such subsidiaries fall outside the scope of the permissible businesses under the Banking Act. A bank or bank holding company that fails to do so would be required to restructure the business of its foreign bank subsidiary(ies) for compliance with the Banking Act or to liquidate the foreign bank subsidiary(ies). Under the Banking Act Amendments, however, the timeframe for such mandatory sell-off has been extended to ten years, with the possibility of a further extension if regulatory approval is obtained. Such extension may be obtained if it can be shown that the extension is necessary for the competitiveness of the foreign bank subsidiaries. The Banking Act Amendments also allow banks and bank holding companies to invest directly in foreign money lenders and leasing companies that concurrently engage in non-“finance-related” businesses, as long as the main businesses of such money lenders and leasing companies are money lending, leasing or other finance-related businesses.

2. AMENDMENTS TO FIREWALL REGULATIONS

The FIEA and the COOFIB both contain “Ginsho firewall regulations.” (A Ginsho firewall refers to a firewall between banks and securities firms.) As a general rule, pursuant to such regulation, no non-public information regarding a client may be shared between a bank and a securities company within the same financial group without that client’s prior written consent.

Following discussions at the Council’s “Working Group on Capital Market Regulations”, the Council published its first capital market report (“First Capital Market Report”) on December 23, 2020, followed by a second capital market report (“Second Capital Market Report”) on June 18, 2021.

The First Capital Market Report addresses, among other issues, amendments to the firewall regulations between banks and securities firms in respect of foreign corporate clients.

The Second Capital Market Report addresses, among other issues, amendments to the firewall regulations between banks and securities firms in respect of domestic clients.

(i) Foreign Corporate Client Information Firewall

As mentioned above, as a general rule, pursuant to the firewall regulations, no non-public information regarding a client may be shared between a bank and a securities company within the same financial group without that client’s prior written consent. Such general rule was applicable to foreign corporate clients unless certain exemptions apply (such as where an opt-out option is given to a client (enabling a client to opt out of the sharing of its information between a bank and a securities company within the same financial group) and the client chooses not to opt out, or where consent by email is provided by a client).

According to the First Capital Market Report, however, non-public information relating to foreign corporate clients should be excluded from the scope of the Ginsho firewall regulation. Accordingly, amendments to the COOFIB to exclude information relating to foreign corporate clients from the definition of non-public information were proposed, and subsequently published for public consultation on March 26, 2021. This was followed by eventual amendments to the COOFIB based on the recommendations in the First Capital Market Report, which came into force on June 30, 2021.

(ii) Domestic Client Information Firewall

As noted above, pursuant to discussions at the Council’s “Working Group on Capital Market Regulations” following publication of the First Capital Market Report, a Second Capital Market Report was published on June 18, 2021. The Second Capital Market Report contains the Council’s further recommendations on amendments to the COOFIB, including recommendations for amendments to be made to the Ginsho firewall regulation in respect of domestic clients. As noted above, the general rule under current regulations is that a domestic client’s prior written consent is needed before non-public information regarding client can be shared between a bank and a securities company within the same financial group. However, the consent to sharing of non-public information relating to domestic corporate clients (i.e., excluding domestic clients who are individuals) is subject to an opt-out rule.

According to the Second Capital Market Report and the amendments to the COOFIB, such firewall regulations for domestic clients will be relaxed to a certain extent. More specifically, for clients that belong to a corporate group that includes listed companies (“Listed Company-Related Clients”), prior written consent would not be necessary for the sharing of non-public information regarding that client between a banking entity and a securities company within the same corporate group, unless the client specifically opts out of such information sharing.

Further, the procedures for opt-in will be simplified for both the domestic corporate clients as well as the domestic individual clients under the amendments to the COOFIB, based on the Second Capital Market Report.

For example, under the amended COOFIB, which is based on the Second Capital Market Report, electronic media (such as email) are now acceptable media through which clients may indicate their agreement to opt into information-sharing. Certain other measures were also implemented in the amendments to the COOFIB. Among these is the relaxation of the limitations on access to non-public information by those who double-hat as officers and/or employees of both a bank and the securities company within the same banking group. Under such measures, information-sharing between banks and securities companies within a banking group will be relaxed.

In exchange for such relaxation of the regulations on information-sharing, regulations on strengthening the effectiveness of prevention of harmful effects of information-sharing between banks and securities companies will be enhanced. According to the Second Capital Market Report, the amendments to the COOFIB, as well as the relevant supervisory guidelines, the regulations to be enhanced will include those relating to (i) management of customer information by banks (e.g., prohibition against the sale and purchase of securities by banks and their employees based on undisclosed material information in respect of listed companies and implementation of internal management systems based on the “need-to-know principle”), (ii) management of conflict of interests among the banking groups (which will enhance the way conflicts of interests are managed by a banking group) and (iii) prevention of abuse of dominant bargaining position by banks (e.g., enhancing regulatory supervision of such abusive actions in coordination with the Japan Fair Trade Commission).

Amendments to the COOFIB as well as the supervisory guidelines reflecting the recommendations in the Second Capital Market Report, were published for public consultation on December 24, 2021. The eventual amendments to the COOFIB, after the public consultation period, came into force on June 22, 2022. At the same time, the FSA also established a desk dedicated to the collection of information on abuse of dominant bargaining position relating to firewall regulations.

(iii) Further developments

The relaxation of regulations pursuant to the Banking Amendments has been welcomed by the banks and banking groups in Japan, and further relaxation of regulations on the business scope of banks and bank group companies have been proposed and appear to be forthcoming in the foreseeable future. Indeed, some amendments have already come into effect and some proposals, based on industry demands, have been made available for public comments. More specifically, on June 1, 2023, the FSA has made amendments to its supervisory guidelines to clarify that banks and banking groups may, before obtaining an Investment Approval, conduct experimental tests in respect of the businesses they plan to conduct after obtaining an Investment Approval. Further, on June 30, 2023, the FSA published proposals for amendments to Cabinet Ordinances relating to the Banking Act and relevant supervisory guidelines. Among the suggested amendments was a proposal allowing banks to engage in the intermediation of issuance of credit cards by credit card companies.

Moreover, it was noted in the “Grand Design and Action Plan for a New Form of Capitalism 2023 (Revised Version)”, which was published on June 16, 2023 and adopted by the Cabinet, that the Japanese government will promote the relaxation of requirements for investment regulations, in order to expand the scope of startups that banking groups can invest in, so as to provide more support for startups. Considering these recent trends, the scope of businesses that banks and their subsidiaries may conduct are expected to be further relaxed if the regulatory authorities consider such relaxation necessary and if such relaxation is unlikely to adversely affect the effectiveness of regulations on the scope of businesses that banks and their subsidiaries may conduct. With that said, the separation of “banking” and “commerce” will still be maintained under the Banking Act.

With regard to the firewall regulations, the regulatory authorities are currently discussing whether regulations on sharing of non-public information of clients should be further amended to provide greater convenience for bank customers, but in a way that balances the need for customer-protection. In line with this, the Working Group on Capital Market Regulations has published an interim report in June 2022 and a second interim report in December 22. It is stated in both reports that the Working Group will continue to consider the possibility of relaxing the firewall regulations, while examining the effectiveness of measures that have been implemented to prevent the harmful effects of information-sharing between banks and securities companies. In this connection, it was stated in a paper published by the FSA on August 29, 2023, titled “The JFSA Strategic Priorities July 2023 – June 2024”, that FSA will deliberate on possible amendments to the firewall regulations, taking into consideration the level of protection provided by financial institutions to their customers, as well as the need to facilitate the ability of financial institutions to provide their customers with adequate financial services. Further developments are expected, and industry watchers are closely monitoring the situation for clues on the position that the regulatory authorities will ultimately take.