Highlights of FSA Meetings with Industry Groups: July 2024

The Financial Services Agency (FSA) held several meetings with Japanese financial industry groups in July 2024, covering a wide range of topics. As the participation is rotating on a monthly basis, not all industry groups are represented every month. In July, the FSA met with the Japan Regional Bank Association, the National Association of Credit Banks, the Trust Association, the Life Insurance Association of Japan, the General Insurance Association of Japan, and the Japan Securities Dealers Association.

1. Overall Economic and Market Environment

• The FSA acknowledges the changing economic and market conditions in Japan, highlighting the shift in Bank of Japan’s monetary policy framework in March 2024, leading to a 17-year high interest rate rise. This has prompted many financial institutions to raise deposit interest rates. Further interest rate hikes are anticipated, urging careful monitoring of market trends.
• The FSA emphasized that interest rate fluctuations significantly impact customers, requiring financial institutions to provide thorough explanations to corporate customers regarding loan interest rate discussions and offer personalized repayment plan advice based on individual borrower circumstances.
• The FSA pledged to continuously monitor the impact of monetary policy and financial institutions’ actions on small and medium-sized enterprises and home loan borrowers.

2. Financial Intermediation Function

• The FSA acknowledged the normalization of socio-economic activities post-COVID-19 and the recent peak in loan repayments for government-backed zero-interest, unsecured loans in April 2024. This marks a significant shift in financial support, moving from liquidity provision to business improvement and revitalization support.
• The FSA urged financial institutions to actively leverage their consulting capabilities to assist businesses in resolving challenges, promoting business improvement, and supporting business revitalization.
• The FSA expressed gratitude for the cooperation received in enacting the “Act on the Promotion of Business-Oriented Finance, etc.” which came into effect during the 213th ordinary session of the Diet and includes the establishment of security interests in business value.

3. Customer-Oriented Business Operations and Financial Literacy

• The FSA emphasized the importance of creating a secure environment for households to purchase financial products, highlighting the 2023 amendment to the Financial Instruments and Exchange Act, which mandates that financial institutions conduct business with integrity and fairness, considering the best interests of their customers.
• The FSA reminded financial institutions to avoid simply catering to superficial customer needs and urged them to re-evaluate their practices, ensuring they offer suitable financial products tailored to each customer’s knowledge, experience, and risk tolerance, with clear and understandable explanations.
• The FSA stressed the significance of enhancing national financial literacy to facilitate informed financial product choices. To achieve this, the newly established Japan Financial Literacy Education Center (J-FLEC) in April 2024 will offer financial literacy education opportunities to the public. The FSA seeks active collaboration with regional financial institutions to expand J-FLEC’s reach nationwide.

4. Regional Banks’ Role in M&A Intermediation and Support

• Regional banks are increasingly expected to proactively support M&A transactions, recognizing their growing importance in promoting business growth and facilitating smooth business successions.
• The FSA, in line with the June 2024 Cabinet decision on the Basic Policy on Economic and Fiscal Management and Reform, encourages regional banks to:
  - Proactively support M&A activities for client companies and enhance their operational frameworks for providing such support.
  - Provide explanations to businesses on how to increase the likelihood of releasing personal guarantees when engaging in M&A transactions.
• The FSA announced plans to revise supervisory guidelines based on these points and released a draft version on June 27th. Following the public comment period, the finalized guidelines are expected to encourage regional banks to proactively engage in M&A support, including proposing optimal solutions that encompass M&A options.

5. “Program for the Reform of Personal Guarantees” Implementation Progress

• The FSA released the results of the “Program for the Reform of Personal Guarantees” for fiscal year 2023 at the end of June. The overall average percentage of unsecured loans increased to 47.5%, significantly exceeding the 33.9% recorded in fiscal year 2022.
• Regional banks also saw an increase in the average percentage of unsecured loans, reaching 55.6%, surpassing the 40.1% recorded in fiscal year 2022.
• The FSA, alongside the progress report, also published a collection of best practices for promoting unsecured lending, adopted under the “Program for the Reform of Personal Guarantees.”
• The FSA urged financial institutions to continue working towards eliminating reliance on personal guarantees for loans.
• Regarding the previously raised issue of incomplete explanation procedures for personal guarantee contracts concluded before March 2023, the FSA conducted a survey on the status of explanations provided for these contracts as of March 2024. The survey revealed that some financial institutions had either not provided explanations to a majority of borrowers or were unaware of the status of explanations provided.
• To address this, the FSA included provisions in the draft revised supervisory guidelines requiring financial institutions to provide explanations and maintain records regarding the necessity of personal guarantees for contracts concluded before March 2023. The public comment period for these guidelines commenced at the end of June.
• Financial institutions that have not yet completed their explanation procedures are urged to finalize them by March 2025, taking into consideration the intent of the revised supervisory guidelines.

6. Revision of Reporting Frequency for “Implementation Status of Changes in Loan Terms, etc.”

• Financial institutions have consistently requested a reduction in the reporting burden for the “Implementation Status of Changes in Loan Terms, etc.”
• Recognizing this, the FSA intends to maintain the current quarterly reporting frequency for the first half of fiscal year 2024 (covering April-September 2024) to closely monitor the impact of the final repayment peak for zero-interest, unsecured loans in April 2024.
• However, in response to industry feedback, the FSA is considering revising the reporting frequency for the number of SME loans from quarterly to semi-annually, starting from the second half of fiscal year 2024 (covering October 2024 — March 2025). A formal announcement regarding this change will be made before the start of the second half of the fiscal year.

7. “Guidelines for Business Revitalization, etc. of Small and Medium-Sized Enterprises” Implementation Status

• On July 5th, the FSA released the implementation status report for fiscal year 2023 for the “Guidelines for Business Revitalization, etc. of Small and Medium-Sized Enterprises.”
• The number of business revitalization and repayment plans approved using these guidelines reached 133 cases in fiscal year 2023, a significant increase from the 28 cases reported in fiscal year 2022.
• The report also shows a wider geographical reach with implementation results being reported from 37 prefectures. Additionally, nearly half of the banks surveyed indicated using these guidelines.

8. Regional Financial Institutions’ Support for Human Resource Matching

• The FSA expressed gratitude to regional financial institutions for their ongoing efforts in promoting human resource matching using the “REVICareer” platform.
• As of the end of June 2024, the platform recorded a cumulative total of 3,159 registered large company personnel, 2,064 job postings, and 97 successful matches. Notably, the number of job postings surpassed 2,000, demonstrating the platform’s growing use.
• The FSA expressed appreciation to participants and presenters at the “REVICareer Case Sharing Session” held on June 24th and encouraged continued active utilization of the platform to address regional business needs.
• The June 21st Cabinet decision on the “Grand Design and Action Plan for New Capitalism 2024 Revised Edition” specifically mentioned promoting matching through the “Regional Business Management Personnel Matching Promotion Project.” The FSA is committed to supporting regional financial institutions’ efforts in human resource matching.

9. Financial Support Measures for Heavy Rain Disasters in July 2024

• The FSA offered condolences to those affected by the heavy rain disasters that began on July 9th, 2024.
• Following the application of the Disaster Relief Act in Shimane Prefecture, the Chugoku Finance Bureau, in collaboration with the Bank of Japan, issued a “Request for Financial Measures” to relevant financial institutions in Shimane Prefecture on July 11th.
• Similarly, on July 25th, following the application of the Disaster Relief Act in Yamagata and Akita Prefectures, the Tohoku Finance Bureau, in collaboration with the Bank of Japan, issued a “Request for Financial Measures” to relevant financial institutions in those prefectures.
• The FSA urged financial institutions operating in disaster-affected areas to prioritize the needs of disaster victims, thoroughly assess their situations, and provide tailored support measures.

10. Proactive Dissemination of the Natural Disaster Guidelines

• The FSA emphasized the importance of utilizing the “Guidelines for Debt Restructuring of Disaster Victims” in addressing double loan issues for individuals affected by natural disasters.
• While the FSA acknowledges the 132 cases where registered support specialists were assigned to assist with the 2024 Noto Peninsula Earthquake as of the end of June 2024, continued promotion of these guidelines remains crucial.
• Financial institutions are urged to proactively inform disaster victims about these guidelines, particularly those facing difficulties repaying housing loans or other debts due to natural disasters, including the recent Noto Peninsula Earthquake. For instance, institutions should provide information about these guidelines when receiving requests for temporary suspension of repayments, changes in loan terms, or applications for additional housing loans from individuals with existing debts.

11. “Corporate Questionnaire Survey” Results

• The FSA has been conducting annual questionnaire surveys since fiscal year 2015, targeting businesses that primarily rely on regional financial institutions as their main banks. The survey results for the questionnaire conducted in January 2024 were released on June 28th.
• The survey assessed businesses’ satisfaction with their main banks’ financial intermediation processes, support services, recruitment of management personnel, status of personal guarantees, and support for business revitalization.

12. Financial System Stability and Exercise of Financial Intermediation Function

• The FSA views the sustained exercise of high-quality financial intermediation functions by banks and the maintenance of their financial soundness over the medium to long term as interconnected.
• The FSA’s monitoring department emphasizes the importance of banks establishing robust credit risk and market risk management systems, engaging in customer-oriented business operations, and implementing cybersecurity measures.
• The FSA will continue monitoring these aspects closely.
• Recognizing the changing landscape of financial policies in Japan, the FSA highlights the need for banks to adapt to new risks.
• The FSA will conduct cross-sectoral monitoring, focusing on the following categories:
  - Credit risk management: Review the effectiveness of loan screening and management systems, including large-scale loans, domestic and international real estate financing, and domestic leveraged buyouts (LBOs).
  - The FSA will also assess the effectiveness of the process for identifying and assessing credit risks, including evaluating individual borrowers’ circumstances if necessary.
  - Market risk management: In light of rising Japanese yen interest rates, the FSA will monitor banks’ understanding of recent market trends and assess their management of interest rate risk across assets and liabilities, including loans and deposits. The FSA will also collaborate with the Bank of Japan to evaluate banks’ preparedness for stress scenarios.
  - Liquidity risk management: The FSA will focus on foreign currency liquidity risk management and its enhancement.
  - Group (and global) governance: The FSA will review the effectiveness of group-level governance, including internal audits.
• The FSA will analyze information gathered from monitoring activities and proactively disseminate valuable insights to support banks in enhancing their risk management practices.

13. Cyber Security Risk Management of Outsourced Companies

• The FSA addressed recent cases where servers of companies outsourcing services for financial institutions were infected with ransomware, leading to the leakage of customer information from these outsourced companies.
• The FSA emphasized that financial institutions outsourcing services must verify the information of outsourced clients and take appropriate measures in accordance with the Personal Information Protection Law if leaks are discovered.
• The FSA is currently reviewing the management of outsourced companies by financial institutions.

14. Measures against Financial Crimes

• In June 2024, the Japanese government formulated a comprehensive strategy to combat fraud, including special fraud, romance scams, and phishing attacks, in response to the increasing damage caused by these crimes.
• Accordingly, the FSA reorganized its existing Money Laundering and Terrorist Financing Countermeasures Planning Office into a “Financial Crime Prevention Office” in July 2024.
• The FSA emphasized that beyond addressing FATF compliance and regulatory requirements, it is crucial to prioritize preventing financial crime victimization to ensure user confidence in financial services.
• The FSA, working with relevant ministries and industry organizations, is committed to swiftly implementing the measures outlined in the comprehensive plan, including those related to preventing the fraudulent use of legal entity accounts and deposit accounts, to combat financial crimes.

15. Publication of “Analysis Report on System Failures at Financial Institutions”

• On June 26th, the FSA published an “Analysis Report on System Failures at Financial Institutions” summarizing trends and specific cases of system failures that occurred in fiscal year 2023.
• The report categorizes and analyzes failures based on their triggers, identifying root causes and associated challenges.
• To enhance IT resilience, the report includes examples of successful responses to system failures, such as smooth customer service during ATM outages and seamless system recovery following contingency plans.
• The report also features columns on “Best Practices and Challenges of Threat-Based Penetration Testing (TLPT) at Financial Institutions” and “Overview of Dialogue and Collaboration with Financial Institutions Regarding Operational Resilience.”

16. Fiscal Year 2024 Cyber Security Self-Assessment (CSSA)

• The FSA requested financial institutions to conduct self-assessments using the “Cybersecurity Self-Assessment Questionnaire” for fiscal year 2024. This questionnaire was introduced in fiscal year 2022, and the results for fiscal year 2023 were published on the FSA website in April 2024.
• The FSA encourages management teams to utilize this questionnaire to assess their organization’s cybersecurity posture, encompassing areas like organizational structure, resource allocation (personnel and budget), and personnel training. The goal is to proactively lead improvements based on this assessment.
• The FSA will collect and aggregate the self-assessment results and share feedback with financial institutions.

17. Publication of Data Analysis Examples in Real Estate Lending

• On July 2nd and 9th, the FSA published “FSA Analytical Notes — Collection of Data Analysis Examples by the FSA — (2024.7),” showcasing examples of data analysis conducted by the FSA as part of its efforts to enhance data utilization.
• The report features four analyses, including an “Analysis of Real Estate Lending and Borrower Segment Trends at Regional Banks,” which partially utilizes loan details data collected through the Joint Data Platform.
• While the analysis focuses on regional banks due to data limitations, the FSA recognizes the importance of monitoring real estate lending trends across all institutions, especially given current market conditions.
• The FSA plans to continue conducting multi-faceted analyses using granular data from various sectors, aiming to further enhance data-driven monitoring.

18. Basic Policy on Economic and Fiscal Management and Reform, and New Capitalism Execution Plan

• The “Basic Policy on Economic and Fiscal Management and Reform 2024” and the “Grand Design and Action Plan for New Capitalism 2024 Revised Edition” were approved by the Cabinet on June 21st.
• Key initiatives related to the FSA include:
  - Promoting business revitalization, recovery, and re-challenge support; facilitating business succession and M&A support by financial institutions.
  - Enhancing matching support between large corporations and regional SMEs by regional financial institutions.
  - Expanding the use of NISA and strengthening financial and economic education; promoting corporate governance reforms; enhancing asset management and asset ownership reform; and advancing initiatives toward establishing Japan as an asset management powerhouse.
  - Revitalizing the flow of unlisted stocks and creating a favorable environment for financing startups.
  - Promoting impact investing and transition finance; supporting region-specific GX system development; promoting disclosure of sustainability information; and undertaking other sustainable finance initiatives.

19. Public Comments on Asset Owner Principles

• The government is actively pursuing reforms to asset ownership as outlined in the “Plan for Realizing Japan as an Asset Management Powerhouse” formulated in December 2023. This aims to achieve a virtuous cycle of growth and distribution.
• One initiative is the “Asset Owner Principles,” a set of shared principles governing asset owners’ investment, governance, and risk management. These principles have been developed by a working group within the Cabinet Secretariat and were open for public comment starting June 24th, 2024.
• Trust banks are encouraged to consider adopting these principles once they are finalized, leveraging their expertise in supporting corporate pension fund management.

20. Progress on FATF Recommendation 16 (Cross-Border Wire Transfers)

• The Financial Action Task Force (FATF) is currently revising Recommendation 16 to ensure compliance with necessary AML/CFT measures and maintain technological neutrality in the FATF standards. This revision aims to accommodate the emergence of new payment methods, technologies, and players in the payment market landscape, as well as the standardization of payment formats. The goal is to make cross-border wire transfers faster, cheaper, more transparent, and inclusive.
• The FSA expressed gratitude for valuable feedback received from the industry during the public consultation period, which was conducted from the end of February to early May 2024.
• At the FATF plenary meeting held from June 26th to 28th, 2024, members acknowledged the complexity of the proposed revisions to Recommendation 16 and their potential impact on payment systems. Consequently, it was agreed that further dialogue with stakeholders from both the public and private sectors is necessary before finalizing the revisions. This process will require additional time.
• The FSA is committed to contributing to these discussions, taking into account feedback from the industry.

21. External Audit and Audit Review Board Monitoring Activities

• The Certified Public Accountants and Audit Review Board plans to release its “Monitoring Report” for fiscal year 2024 on July 19th, providing insights into the current state of the audit industry and the Board’s monitoring activities.

22. Initiatives for the Development of the Asset Management Industry

• The FSA announced the establishment of two new departments effective July 1st, 2024, to support the development of the asset management industry:
  - Asset Management Monitoring Office: Transferred from the Securities Division to the General Affairs Division, this office oversees the supervisory work related to the asset management industry.
  - Asset Management Planning Office: Newly established within the General Affairs Division, this office is responsible for planning and policy development related to promoting the sophistication of the asset management industry.
• The FSA reiterated its commitment to promoting a sound development of the asset management industry and urged continued cooperation from the industry.

23. Provision of Account Information Used by Unregistered Businesses for Foreign Exchange Transactions

• It is illegal to engage in foreign exchange transactions as a business without obtaining a banking license under the Banking Act or registration as a funds transfer business operator under the Payment Services Act.
• However, there have been cases where unregistered businesses are involved in remittance transactions to illegal websites such as online casinos. In some cases, bank accounts opened by these unregistered businesses at financial institutions are being used for these foreign exchange transactions.
• To address this issue, the FSA revised the Administrative Guidelines for Funds Transfer Business Operators (related to funds transfer business operators) on May 17th, 2024. The revision clarified that if the FSA obtains information about bank accounts being used for transactions by malicious unregistered businesses, such as remittances to online casinos, it will provide relevant information regarding the misuse of bank accounts to the financial institution where the account is held.
• The FSA issued a notification to relevant industry groups on June 28th, 2024, based on this revision.
• Financial institutions are urged to take necessary actions when they receive such information, including fulfilling obligations under the Act on Prevention of Transfer of Criminal Proceeds and implementing risk mitigation measures based on the AML/CFT Guidelines.

Please follow us to read more about Finance & FinTech in Japan, like hundreds of readers do every day. We invite you to also register for our short weekly digest, the “Japan FinTech Observer”, on Medium or on LinkedIn. Our global Finance & FinTech Podcast, “eXponential Finance” is also available through its own LinkedIn newsletter, or via our Podcast Page.

Should you live in Tokyo, or just pass through, please also join our meetup. In any case, our YouTube channel and LinkedIn page are there for you as well.