The rapid development of information and communication technologies in recent years has enabled entrepreneurs to create and offer innovative services to the financial industry. In particular, there has been a growing need for one-stop online platforms enabling access to financial services of various kinds. There has also been a rise in demand for convenient cashless payment services. Against this backdrop, since November 2017 the Financial Services Agency (FSA), Japan's financial regulator, has been looking to refine the financial regulatory framework with the aim of enhancing user convenience and safety.
After extended discussions, the FSA eventually submitted a bill to the Diet on March 6 2020. The bill is designed, among other things, to introduce a new category of business termed a "financial service intermediary", and to refine the existing regulatory framework for payment services. The bill was passed by the Diet on June 5 2020.
Introducing the One-Stop Financial Service Intermediary
Among the online platforms that have experienced increasing demand are mobile apps that enable users to check their bank accounts and apps that recommend suitable financial services (such as loans, securities investments and/or insurance products) to users based on their financial situation, income and expenditure and personal needs.
Under the financial regulatory regime in Japan, service providers offering mobile apps of this kind are regarded as "intermediaries" for banks, securities firms, investment advisers/managers and/or insurance companies. Such intermediaries are required to be licensed or registered separately under vertically segmented legislation, including the Banking Act, the Financial Instruments and Exchange Act and the Insurance Business Act. These pieces of legislation subject service providers to the instructions and supervisory oversight of the banks, securities firms, investment advisers/managers and/or insurance companies to which such service providers act as intermediaries. This makes it difficult for these service providers to introduce a wide range of financial services, and this in turn limits their ability to promote greater user convenience.
To resolve this issue, the bill introduces a new category of business called the "financial service intermediary". Under the bill, financial service intermediaries will be permitted to recommend deposit, money transfer, loan, securities investment and/or insurance products to users or to intermediate between such users and the relevant financial service providers.
Specifically, the bill enables a financial service intermediary to do this through a single registration as a financial service intermediary under the new Act on Offer of Financial Services (New Act), renamed from the existing Act on Sale of Financial Instruments. The New Act will not require a financial service intermediary to be tied to any specific financial service provider. This will enable financial service intermediaries to offer a wide range of financial services as a one-stop shop. Furthermore, the New Act will enable financial service intermediaries that meet certain conditions to send remittance orders to banks for and on behalf of users and/or provide bank account information to users through electronic means upon user request. Qualifying financial service intermediaries can do so by filing a simple notification with the FSA under the New Act, without having to undergo registration as an electronic settlement agent under the Banking Act.
As financial service intermediaries will not be tied to or subject to the supervision of any specific financial service providers, these intermediaries may not offer financial services as an "agent" of any financial service provider, but will instead be required to hold sufficient security deposits to meet the needs of its own intermediary business. Additionally, a financial service intermediary will not be permitted to accept users' money for and on behalf of any financial service provider. Furthermore, the scope of financial services that a financial service intermediary may recommend to users are limited to those that do not require advanced explanation.
The scope of this limitation is still uncertain at present and will be clarified through subordinate regulation to be subsequently published. It is generally understood, however, that the limitation prohibits financial service intermediaries from recommending complex financial products and services, such as structured or foreign currency-denominated deposits; unlisted stocks, bonds issued by unlisted companies, derivatives or margin trading services; or variable or foreign currency-denominated insurance policies/annuities. Instead, it is generally understood that financial service intermediaries will be allowed to recommend simple financial products and services, such as saving accounts; fixed-term deposits, housing loans, credit card loans and money transfer services; government and local bonds, listed stocks, bonds issued by listed companies, units/shares in investment trusts/corporations and ETFs; and non-variable life and non-life insurance products.
As a financial service intermediary may deal with a wide range of financial services, it will have to comply with certain codes of conduct stipulated under the applicable legislation, such as the Banking Act, the Financial Instruments and Exchange Act, the Insurance Business Act and/or the Money Lending Business Act. As it is a common requirement globally for financial service intermediaries to disclose to users, upon request, the fees and reimbursements they will receive from those financial service providers for which they act as intermediaries, the New Act will impose a similar code of conduct on financial service intermediaries in Japan. The New Act will also require financial service intermediaries to provide users with an explanation of key matters and to properly handle users' information.
The New Act is also expected to establish a certified self-regulatory organisation for financial service intermediaries, although it will not be mandatory for financial service intermediaries to be members of this organisation.
The New Act and related amendments to other legislations will take effect within one and half years following the New Act's promulgation.
A new payment services framework
The existing Payment Services Act (PSA) contemplates a category of businesses called the money transfer business operator. Such business operators are registered under the PSA and are permitted to provide users with money transfer services for up to JPY1 million (approximately $9,000) per transfer.
Service providers wishing to provide users with money transfer services for amounts over JPY1 million per transaction are required to be licensed as a bank under the Banking Act or as a depository institution other than a bank under the relevant legislation. The licensing requirements applicable to bank or depository institutions, however, are extremely stringent. For example, banks are required to have capital of at least JPY2 billion, unlike money transfer business operators, which are not subject to any minimum capital requirements. Nevertheless, money transfer business operators are required to maintain security deposits of an amount that is at least equivalent to the higher of JPY10 million or 100% of their unsettled financial exposure plus enforcement costs.
Moreover, the existing regulatory framework in respect of money transfer business has become too rigid and out-of-date to encourage a greater use of cashless payments. For example, service providers wishing to provide high-value money transfer services without providing other traditional banking services, such as loans, are required to obtain full banking licenses. Meanwhile, those providing money transfer services in respect of only small amounts of up to tens of thousands of yen are required to comply with all the requirements applicable to money transfer business operators that contemplate money transfers of up to JPY1 million per transaction. Accordingly, the amended PSA has refined the regulatory framework surrounding money transfer business operators to group them into the three categories (discussed below), to take into account the amount of funds contemplated in their money transfer businesses.
The first category is the "Type 1 money transfer business operator" (Type 1 Operator). Business operators in this category may provide users with money transfer services without a limit on the amount of money transferred. These business operators will have to submit a business implementation plan to the FSA to obtain FSA approval for the business. Further, as accepting and retaining deposits is generally prohibited, Type 1 Operators can only receive funds from a user when it has specific remittance instructions from the user; the business operators must then immediately transfer the relevant funds in accordance with the user's instructions. Type 1 Operators will also have to engage in the money transfer business in accordance with the business implementation plan approved by the FSA.
The second category is the "Type 2 money transfer business operator" (Type 2 Operator). Business operators in this category will be subject to largely the same regulatory framework as that applicable to existing money transfer business operators. What this means is that such business operators may transfer a user's funds up to the limit of JPY1 million per transaction. However, Type 2 Operators will additionally be required, under the amended PSA, to ensure that they do not receive or retain any user funds that are unlikely to be transferred. It is expected that Type 2 Operators will be required to return such user funds.
The third category is the "Type 3 money transfer business operator" (Type 3 Operator). These business operators may provide money transfer services in respect of small amounts only. The applicable limit will be prescribed in the relevant subordinate regulation, to be subsequently published. However, it is generally expected that Type 3 Operators will be able to transfer up to tens of thousands of Japanese yen per transaction, per user. Accordingly, Type 3 Operators are expected to be prohibited from accepting and retaining user funds exceeding the applicable limit.
Rules of conduct
As noted above, money transfer business operators are required under the current PSA to maintain security deposits. These security deposits can be made in any of the following three ways: making a cash deposit with an official depository; entering into a security deposit agreement with a designated bank or insurance company; or entering into a trust agreement with a trust bank or company.
However, the existing PSA does not allow the concurrent use of these three methods. There is also a time lag of up to one week between the date on which the amount of the security deposit is calculated and the date on which the security deposit is adjusted. Additionally, security deposits maintained using the first two options above are calculated on a weekly basis, while security deposit amounts maintained using the third option are calculated on a business daily basis.
In response to these issues, the amended PSA permits the concurrent use of all three options. Furthermore, the amended PSA unifies the frequency of calculation of the security deposit to more than once a week and shortens the one-week time lag mentioned above. As a result, Type 1 Operators will be required to make cash deposits, calculated on a business daily basis, to an official depository within the prescribed period stated in the relevant subordinate regulations to be published (which will perhaps be two business days). Type 2 or 3 Operators will be required to make regular cash deposits that are calculated periodically, at least once a week, within one week of calculation at the latest. In each case, it will not be necessary to make cash deposits with an official depository in respect of the amounts under the second or third option.
Furthermore, the amended PSA permits a Type 3 Operator to maintain security deposits in a less cumbersome manner. Specifically, cash deposits can be deposited with a segregated bank account maintained by the Type 3 Operator itself, on the condition that the operator undergoes an audit by a certified public accountant or audit firm. This new framework will not only enhance user protection but also make money transfer business operators easier to use.
The amended PSA also clarifies the definition of "money transfer". Under the definition, service providers offering a split-the-bill mobile app for the use of individuals will be regulated as money transfer business operators, while service providers receiving proceeds on behalf of their business clients and escrow service providers will likely remain unregulated.
In view of this, it will be essential under the amended PSA to examine the nature of each and every service to determine whether it is subject to the regulations applicable to money transfer business operators.
The amended PSA will take effect within a year of its promulgation.
Partner, Anderson Mori & Tomotsune
Shunsuke Aoki advises primarily on financial regulatory matters with a particular focus on fintech regulations and corporate finance transactions, including equity and debt offerings in both the domestic and international capital markets. Shunsuke also regularly assists overseas clients in the cryptocurrency and crypto derivatives industries, on their entry into or exit from the Japanese market. Capitalising on his two-year stint with one of Japan's leading securities houses, Shunsuke also acts for domestic financial institutions in their structuring of various financial instruments using innovative technologies such as blockchain. Additionally, Shunsuke has considerable experience in matters relating to security tokens.
Shunsuke serves as a member of a research group, established by one of Japan's leading securities houses, that is looking at the use of blockchain technology in the financial markets. Members of the research group include experts from industry and academia.
Partner, Anderson Mori & Tomotsune
Ken Kawai has extensive experience advising financial institutions, fintech start-ups, investors and corporate clients on complex finance and financial regulatory matters. Ken focuses primarily on the fintech industry, and regularly advises fintech companies, financial institutions, international organisations and industry organisations on legal issues surrounding fintech, including the complex legal framework governing cryptocurrencies, and blockchain.
Ken also specialises in derivatives, and has counselled global banks, broker-dealers and investors on regulatory matters and best practices in respect of derivatives and related products. He derives his deep and practical knowledge in this area from his 17 year career at MUFG Bank, where he was involved in derivatives trading and marketing.
Ken's practice also involves cyber-security for financial institutions, personal data protection and e-commerce.
Partner, Anderson Mori & Tomotsune
Akihito Miyake covers a wide range of financial regulatory matters. He especially focuses on all aspects of legal issues related to the asset management businesses. He has significant experience providing legal services and advice in relation to the formation, offering and distribution of various types of investment funds both inside and outside Japan; the registration of asset managers and distributors acting in Japan; the operations of financial instruments businesses regulated in Japan; business deployment in the Japanese market; inbound investments by foreign asset managers; and outbound investments by domestic investors.
His recent experience also encompasses support in various crypto-related projects such as formation of cryptoasset investment funds and security token offering platforms and advice on cryptocurrency copy trading services.