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Financial alternative dispute resolution

From October 1 2010, banks, insurance companies, non-bank moneylenders and Financial Instruments Business Operators (including investment advisers and investment managers as well as securities companies; collectively, the FIBOs) under the Financial Instruments and Exchange Act (the FIEA) are required to undertake certain measures for the handling of complaints from and the resolving of disputes with their customers or clients.

The purpose of these regulations is to promote the Financial ADR (alternative dispute resolution) system under the FIEA and other financial business laws (together with the FIEA, the Financial Business Laws). However, there are certain outstanding issues regarding the steps required to be undertaken by the FIBOs pursuant to these regulations.

The Financial ADR System was introduced into the Financial Business Laws on April 1 2010. Under the Financial ADR system, entities in each financial business sector including banking, insurance and securities which meet certain requirements may be designated upon the submission and approval of an application as a Designated Dispute Resolving Organisation (shitei-funso-kaiketsu-kikan – the Organisation); these Organisations are to provide complaint-handling and dispute-resolution services to businesses in a designated financial business sector.

Although industrial groups of each financial business sector like the Japanese Bankers Association or the Japan Financial Services Association are expected to become the Organisations and have actually been designated, because the Organisations are not public organisations but mere private entities designated pursuant to the Financial Business Laws following the submission of an application, there may be certain financial business sectors without an Organisation.

To promote the use of the Financial ADR System, in addition to the creation of the Organisations system, from October 1 2010, all financial service providers are required to enter into a "Master Agreement on Implementing Complaint-Handling and Dispute-Resolving Procedures" (tetsuzuki-jisshi-kihon-keiyaku) with one of the Organisations in their financial business sector to manage their customer complaint and dispute-resolution matters.

However, as noted above, it is possible that financial service providers in a specific business sector have no Organisation to which they could entrust the above matters. In such case, the financial service providers will need to take the measures set forth below prescribed in the Financial Service Laws.

As an actual example, although the Financial Instruments Mediation Assistance Center (FINMAC), an organisation for processing complaints and mediating disputes jointly established by the Japan Securities Dealers Association and other four industrial groups in the securities business sector (they all are Financial Instruments Firms Associations (the FIFA) under the FIEA) has already applied for designation, there is no Organisation for the FIBOs as of October 1 2010.

The alternative measure most readily available to the FIBOs is to handle complaints and disputes through the services offered by the FIFAs (through FINMAC). Fortunately, the above five FIFAs cover most part of securities business (brokerage, underwriting, bookmaking of proprietary trading system, investment advisory and investment management), and accordingly, the FIBOs can satisfy the requirement under the FIEA by joining the relevant FIFA as long as their businesses are within the coverage of one of the FIFAs.

Moreover, FINMAC is able to provide the aforementioned services directly to the FIBOs with respect to some areas (for example, the sale of interests in anonymous partnership (tokumei-kumiai)), even if none of the FIFAs deal with such area and the FIBOs may meet the FIEA requirement by registering with FINMAC.

However, if a FIBO does not or cannot enrol in a FIFA corresponding to its business field notwithstanding the existence of an applicable FIFA, the FIBO will be required to take other more complex actions under the FIEA, such as commissioning a bar association to manage the complaint and dispute process.

Yuki Sakamoto

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