Foreign bank agency services, which will be introduced into the Banking Law of Japan (Law 59 of 1981) by The Law for Amendment to the Financial Instruments and Exchange Law, etc (Law 65 of 2008, as amended, the Amendment Law), which was enacted in the Diet on June 6 2008 and promulgated on June 13 2008. The Amendment Law would allow Japanese banks and Japanese branches of foreign banks to provide a wider range of agency and intermediary services on behalf of banks outside Japan, but it may raise a new issue in relation to loans and deposit-taking services directly provided from offshore offices of foreign banks. Provisions concerning foreign bank agency services will become effective from the date specified by the Cabinet order, which will be within six months of the promulgation date of the Amendment Law (December 12 2008 at the latest).
Background
Non-banking operation
There has been much discussion regarding whether banks (including Japanese branches of foreign banks) may engage in agency or intermediary services for the business of foreign banks. The Financial Services Agency of Japan (FSA) has taken the position that such business is outside the scope of the permissible businesses of a bank (or a Japanese branch of a foreign bank). The FSA's position is based on the notion that agency or intermediary services for business, which are permitted to banks as ancillary businesses, are limited to those services listed in Article 13 of the Enforcement Regulation of the Banking Law (which is based on an ordinance whose authority comes from Article 10, Paragraph 2, Item 8 of the Banking Law). Because agency or intermediary services for the business of foreign banks is not listed in Article 10, the FSA has taken the position that banks may not engage in such business except for a limited range of agency or intermediary services that are specified as being ancillary businesses of banks.
There was an argument that such business may be permitted as being other ancillary business (sonotano-fuzuigyomu, Article 10, Paragraph 2), which permits a bank to engage in non-listed businesses that satisfy certain standards under the administrative guidelines. However, in 2006 the FSA stated that agency or intermediary services for the business of other financial institutions is not permitted as other ancillary business. However, if such service remains as introductory service, it is permitted as being other ancillary business. As a practical matter, some banks engage in deposit account introduction services for foreign banks.
Banking business
There are also questions as to whether a foreign bank is deemed to engage in banking business (Article 2, Paragraph 2 and Article 3 of the Banking Law) in Japan even if a bank in Japan (or a Japanese branch of a foreign bank) acts as an agent or intermediary for cash deposit business, lending business or fund remittance business on behalf of the foreign bank. Recently, the FSA asked a foreign bank to stop soliciting Japanese customers to buy their products (deposits, for instance) and services directly through their overseas branch (not through their Japanese branch) because such activities would constitute banking business in Japan, which would require a banking licence under the Banking Law.
Independence of foreign branch
Where a Japanese branch office of a foreign bank acts as an agent or an intermediary for the business of the head office or overseas branches of the same foreign bank, there is an argument that such services are the own business of the branch office of the foreign bank rather than agency or intermediary services for the business of a foreign bank and therefore the branch in Japan should be able to provide agency or intermediary services as long as the services provided by the head office or overseas branch fall within the kind of service that the branch can provide (securities lending services and custodian services, for example). This argument is based on the legal conception that any activities of a branch are the activities of the head office made through the branch rather than the activities of the branch itself as a branch does not have a separate judicial personality to that of the head office.
However, the FSA sees a Japanese branch of a foreign bank as a legally independent bank separate from the head office and overseas branches of the foreign bank, at least for the purposes of the Banking Law. This interpretation is supported by Article 47, Paragraph 2 of the Banking Law, which deems a Japanese branch of a foreign bank to be a bank. Accordingly, if a Japanese branch of a foreign bank acts as an agent or an intermediary for the business of the head office or overseas branches of the foreign bank, it is deemed to be engaged in agency or intermediary services for the business of foreign banks similar to that of Japanese banks.
Second division report
According to the Report of the Second Division of the Financial System Council: discussion on the business scope restriction of bank groups and insurance company groups (announced by the FSA on December 18 2007), the Financial System Council (Council) made a proposal that a bank (including a Japanese branch of a foreign bank) should be permitted to engage in agency or intermediary services for a foreign bank. The Amendment Law will introduce the following special exceptions for foreign bank agency services.
Foreign bank agency services
New ancillary business
Under the Amendment Law, Article 10, Paragraph 2, Item 8-2 will be added to the Banking Law, which permits banks (including Japanese branches of foreign banks) to engage in agency or intermediary services for the business of foreign banks. Such business will be defined as foreign bank agency services (Article 52-2, Paragraph 1 of the Banking Law).
The scope of foreign bank agency services will be defined in the Cabinet office ordinance (Enforcement Regulations of the Banking Law).
According to the FSA's public comments announced on September 22 2008 regarding the Cabinet Ordinances and Cabinet Office Ordinances for the Amendment Law (Public Comments), foreign bank agency services are limited to agency or intermediary services in respect of the core business of a foreign bank (Article 10, Paragraph 1 of the Banking Law: taking deposits, providing loans and the remittance of funds, kawase torihiki) and the ancillary business of a foreign bank (Article 10, Paragraph 2 of the Banking Law, Article 13-2 of the Enforcement Ordinance of the Banking Law).
Furthermore, not all agency or intermediary services for ancillary businesses count as foreign bank agency services. A bank or a foreign bank branch may act as an agent or an intermediary for the ancillary businesses of a foreign bank if such services were already permitted under the Banking Law before the amendment by the Amendment Law. For example, a bank or a foreign bank branch may act as an agent or as an intermediary for derivatives transactions (swaps, forwards or credit derivatives, for example) conducted by a foreign bank (Article 10, Paragraph 2, Items 13 and 15 of the Banking Law) even before the amendment by the Amendment Law. Also, a bank or a foreign bank branch may act as an agent or an intermediary for foreign currency business and the assignment of loan receivables conducted by a foreign bank even before the amendment by the Amendment Law.
Please note that the FSA has not publicly revealed its interpretation of the scope of foreign bank agency services as at November 31 2008. It would be more informative to look at their responses to the Public Comments, which are scheduled to be made public in early December 2008.
In the case of a bank, it may provide foreign bank agency services only for the foreign bank that is a direct or indirect parent company, subsidiary or subsidiary of a parent company of that bank.
In the case of a Japanese branch of a foreign bank, it may provide foreign bank agency services for the foreign head office or overseas branches of that foreign bank, or a direct or indirect parent company, subsidiary or subsidiary of a parent company of that foreign bank (Article 10, Paragraph 2, Item 8-2 of the Banking Law).
Foreign bank branch
Under the Amendment Law, Article 47, Paragraph 3, the head office and other overseas branches of the foreign bank to which a Japanese branch belongs (collectively known as a foreign bank foreign business office, FBFBO) is deemed to be a foreign bank.
Article 47, Paragraph 3 also deems the intermediary functions of a Japanese branch of a foreign bank for the transactions between an FBFBO and Japanese customers to be the intermediary for the business of a foreign bank.
Moreover, the FBFBO is deemed to be a counterparty to the Japanese branch regarding an agreement of the assignment of intermediary services for the business of a foreign bank.
Approval or notification
Where a Japanese bank seeks to engage in foreign bank agency services, it will obtain approval from the prime minister, in advance, for the relevant foreign bank (affiliated foreign bank) that assigns foreign bank agency services to the bank. However, if the foreign bank is the subsidiary of a Japanese bank, a filing of a prior notification with the prime minister by such parent bank would suffice. A parent bank that obtains approval or files a notification will be defined as a foreign bank agency bank.
On the other hand, where a Japanese branch of a foreign bank acts as an agent or intermediary for an FBFBO, it will obtain approval in advance.
Special licensing exception
The Banking Law requires a banking licence for banking business. Even if a bank is permitted to act as an agent or an intermediary for the banking business of a foreign bank, there would be a risk that the foreign bank engages in banking business in Japan without a banking licence. The Amendment Law will provide an exemption for this. Under the Amendment Law, this licence requirement will not be applicable to the business of an affiliated foreign bank for which a foreign bank agency bank provides foreign bank agency services.
Control of contributions, deposits and interest
The Law for the Control, etc of Acceptance of Contributions, Money Deposit and Interest, etc (Law 95 of 1954) (Shusshi-ho) prohibits the acceptance of deposits as a permitted business unless otherwise permitted under other laws (the Banking Law, for example). Pursuant to the Amendment Law, this prohibition will not be applicable to the acceptance of deposits by an affiliated foreign bank to which a foreign bank agency bank provides foreign bank agency services.
Special exception for money lending
The advance of loans from an affiliated foreign bank to Japanese residents in respect of which its foreign bank agency bank acts as an intermediary or an agent will not be treated as money lending business pursuant to Article 2, Paragraph 1 of the Money Lending Business Law (Law 32 of 1983).
Under the Banking Law, because the acceptance of deposits or instalment savings and the making of loans or the discounting of notes or a combination of these constitute banking business, the exclusive making of loans does not constitute banking business. Accordingly, if a foreign bank's activities in Japan are limited to making loans to customers, such activities may fall within the definition of a money lending business under the Money Lending Business Law. However, Article 52-2-4 of the Banking Law will provide an exemption for such a situation.
Impact
Global custody services
Foreign banks are now paying particular attention to whether the agency or intermediary services for the global custody business of a foreign bank falls within the definition of foreign bank agency services. If the global custody business is only considered to be a safekeeping business, which is one of the ancillary businesses of a bank (Article 10, Paragraph 2, Item 10 of the Banking Law), its agency or intermediary services may be considered to be outside the scope of foreign bank agency services. In that case, as such services are non-regulated, not only a bank (or a Japanese branch of a foreign bank) but also other Japanese entities including securities firms may engage in such services.
However, types of global custody services of foreign banks vary. Global custody business often involves deposit taking and overdrafts (provision of loans). The FSA may consider that the agency or intermediary for such services may only be conducted by a bank (or a foreign bank branch) through the foreign bank agency services scheme. In that case, non-banking entities including securities firms may not engage in such services even if the company is a group company of the foreign bank.
Money lending business
The Special Exception for the Money Lending Business Law, as explained above, may affect the current financial schemes as part of which a foreign bank or a foreign money lender directly makes loans to Japanese residents.
In practice, it has been widely understood for a long time that foreign money lenders can extend loans to Japanese residents without being required to register themselves under the Money Lending Business Law. At present, we understand that there are cases in which foreign money lenders (including foreign banks acting through their offshore offices) provide loans to Japanese residents directly or through intermediaries who are registered as money lenders under the Money Lending Business Law (registered money lenders). Also, there are cases in which foreign banks and foreign money lenders participate in syndicated loans to Japanese borrowers.
As explained above, if the Amendment is enacted, a foreign bank will be exempt from the registration requirement under the Money Lending Business Law, as long as its Japanese branch or Japanese bank subsidiary acts as an agent or an intermediary for the foreign bank by way of the foreign bank agency services scheme. In our view, this new exemption would be construed as confirming, despite long-standing practice, that a foreign bank may not make loans to Japanese borrowers through the intermediary of a registered money lender (such as its affiliated securities firm in Japan) except where a foreign bank retains a foreign bank agent bank as its intermediary. Furthermore, there would be the risk that a foreign bank could be prevented from making loans directly to Japanese residents without obtaining a banking licence or a money lender's registration in Japan if they do not have an agent or intermediary in Japan.
In addition, with regard to foreign money lenders that are not banking institutions, they may not make loans even after the implementation of foreign bank agency services, even if a registered money lender acts as its intermediary or an agent, because no exemption will be available to foreign money lenders that are not banking institutions.
The foreign bank agency service will expand the activities of foreign banks, the Japanese branches of foreign banks and Japanese parent banks. However, this service may limit the activities of both non-banking foreign money lenders and non-banking companies (including securities firms) in Japan. We must carefully watch the FSA's interpretations of services.
| Author biography |
Masayuki Watanabe
Anderson Mori & Tomotsune
Masayuki Watanabe is an associate at Anderson Mori & Tomotsune. His practice area involves financial regulations, including banking laws, trust laws and securities laws. In particular, he has been involved with issues relating to the Banking Law, as well as investment banking matters including banks' private equity. Masayuki also assists clients in dealing with the Financial Services Agency and other regulatory bodies and in providing advice on relevant laws and regulations.
In addition to his professional experience at Anderson Mori & Tomotsune, Masayuki has written many influential articles and books in relation to regulatory issues, particularly with respect to the Japanese banking business field. |