This content is from: Local Insights

Japan: Banking group reform

Maiko Shimoda

On June 3 2016, the Reform Act of the Banking Act, etc (the Reform Act), which includes amendments to the Banking Act, was enacted. Its aim is to respond to the diversification of the form of business management in financial groups and the rapid rate of innovation in information technology (IT). The details of the new regulation will remain unclear until the amendments to the relevant cabinet orders are announced. However, the Reform Act concerning the amendments to the Banking Act has already revealed the new regulatory framework for the banking group.

Under the Reform Act, the bank holding company must ensure the appropriate business management for the banking group as a whole; for example, the management of conflicts of interests among the companies in the banking group. This amendment clarifies and enforces the bank holding company's obligation.

On the other hand, the Reform Act deregulates the restriction of services conducted by the companies in a banking group, including the bank holding company. This means that the banking group can integrate overlapping businesses among the group companies; for example, system management activities. The Reform Act also introduces an exemption from the so-called arm's length principle which governs the transaction between the bank and the specified related party, so long as the transaction will not damage the soundness of the management of the bank.

The Reform Act also deregulates the scope of business that subsidiary companies can conduct. This amendment will enable subsidiary companies to both invest in financial technology-related companies and also accept businesses relating to settlement services.

With regard to the foreign banking group, the Reform Act introduces a group-based authorisation to the foreign bank agency service. This will make it convenient for the companies in the group to provide financial services.

The Reform Act is scheduled to come into effect by June 3 2017. The new legislation is expected to promote operational efficiency and the appropriate management of the banking group as a whole, as well as IT innovation in Japan.

Maiko Shimoda

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