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Firewall regulations

Firewall regulations

On June 1 2009 the firewall regulations for banks, securities firms and insurance companies will be revised when an amendment to the Financial Instruments and Exchange Act (FIEA) takes effect. This amendment marks a change in the Japanese government's approach to regulating the management of financial institutions, as it reduces the current restrictions and relies more on industry self-regulation, a move which is expected to make Japanese financial institutions more competitive.

New firewall regulations

The firewall regulations were originally designed to prevent conflicts of interest from arising between customers and investors, and to prevent banks from abusing their dominant bargaining position. Before this amendment, the FIEA prohibited individuals from holding concurrent posts in banks, securities firms and insurance companies, and also prohibited sharing customers' non-public information between companies within a financial group. However, these regulations have not been effective, and are now considered to be overly restrictive in preventing conflicts of interest, especially in light of similar regulations in the US and Europe.

The current restrictions therefore will be relaxed after the amendment. First, the prohibition of holding concurrent posts will be abolished. This will allow individuals to hold concurrent posts not only in management but also in front offices, personnel departments and administrative departments. This should reduce hiring costs, and allow for more integrated and comprehensive management of financial groups.

Second, the regulation against sharing non-public customer information within a financial group's companies will be modified. Under the new regulations, financial groups need not obtain the prior approval of the Financial Services Agency of Japan and may share customers' non-public information within a financial group's companies for internal management purposes. In addition, regarding corporate customers, financial groups will be allowed to share such information for any purpose so long as the groups provide corporate customers with an opportunity to opt-out in advance. In order to share non-public information on individual customers, however, the prior consent of such customers will still be required and there will be no change to the regulation. This sharing of information is significant because it will allow financial groups to compile a better profile of customers, which will reduce their business risk. Customers should also benefit as financial institutions will be better equipped to assess their needs from the collected information and offer more comprehensive and higher quality services to meet these needs. These two changes should create more integrated management of the financial groups.

Systems for managing conflicts of interest

In order to manage such conflicts and to protect the interests of customers, financial institutions are obliged to establish systems for managing conflicts of interest. Such systems must i) indicate transactions that may unfairly impair the interests of customers, ii) ensure the protection of customers' interests, iii) create and publish policies regarding i) and ii), and iv) establish procedures for maintaining records.

As the laws and regulations only set out these general principles, it is expected that financial institutions will through trial and error improve their systems for managing conflicts of interest. Simply establishing a system for managing conflicts is required as a result of the relaxed regulations; however, it is thought that financial institutions will take the initiative to develop effective systems.

As in recent years there has been a movement among financial institutions to join and form group institutions, it is essential for each financial group to offer various and high quality services to customers in order to survive the competition. Thanks to this amendment, it is expected that financial groups will be able to offer such services, and thereby strengthen Japan's financial and capital markets.

Sayaka Matsui

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