The Japan FSA Regulatory Sandbox
On September 21, 2017, the Japan Financial Services Agency (FSA) announced a “FinTech Proof-of-Concept (PoC) Hub” (FinTech実証実験ハブ) to eliminate concerns that FinTech enterprises, financial institutions and others are unwilling to pursue innovation when faced with regulation. Noticeably, the language used differed from that applied by regulators in other jurisdictions, who are commonly referring to a “regulatory sandbox”. One reason might be that the latter term is used in Japan when discussing the suspension of certain regulations for whole municipalities, e.g. in the case of autonomous vehicles. However, it is also expected that the learnings from the FinTech PoC Hub over a period of up to two years will be used to develop a fully fledged regulatory sandbox, taking into account the global context (see the recent G20 discussion).
The FinTech PoC Hub is designed to make it possible for FinTech companies, financial institutions, and others to think about issues that they would like to evaluate through PoCs in the areas of compliance, supervisory response risks, interpretation of legislation, etc. that can occur when providing services for retail customers. With regard to such practical issues, the FSA will form a team within the agency for each individual experiment to provide ongoing support.
The FSA will decide whether or not support a specific PoC based on the application submitted. The following descriptions need to be included in the application:
- PoC approach and boundaries are clearly laid out
- The services are expected to improve user convenience and corporate productivity in Japan (social significance)
- Level of innovation in the service to be realized
- When a retail customer participates in the PoC, it is necessary to properly deal with customer protection, including explanation to customers
- Resources such as funding and personnel necessary for conducting the PoC are secured (feasibility of carrying out experiments)
Even if the above points are satisfied, if there are many concurrent applications, the FSA reserves the right to prioritize specific matters. Applications can be submitted to firstname.lastname@example.org.
The FSA may conduct hearings as necessary to process the applications. For projects that get accepted in the FinTech PoC Hub, the FSA will make a public announcement on the Financial Services Agency website, including the company name and case outline, excluding sensitive information on business ideas.
Also, upon completion of the PoC, consideration should be given to sensitive information on the publication timing and business ideas, the issues concerning compliance and oversight handled through the PoC, when providing services for retail customers. The FSA will make an announcement on the Financial Services Agency website about the results of the PoC and conclusions including practical issues relating to legal interpretation that could. It is noted that the FinTech PoC Hub does not provide an exemption from existing laws and regulations.
On November 2, 2017, the FSA announced that the following participants had been accepted into the FinTech PoC Hub:
- Mizuho Financial Group, Inc.
- Sumitomo Mitsui Financial Group, Inc.
- Mitsubishi UFJ Financial Group, Inc.
- Deloitte Tohmatsu Group
The PoC proposed by these parties includes the building of a system to jointly implement customer identity verification procedures using block chain technology (customers who have already verified their identity in any of the financial institutions participating in this framework and are interested in participating with other participating financial institutions, develop a mechanism that does not reconfirm the identity again. The Deloitte press release includes a detailed explanation (in Japanese). The PoC was scheduled to run from November 2017 through March 2018.
On March 16, 2018, the FSA announced that the following participants had been accepted into the FinTech PoC Hub:
- Dai Nippon Printing Co., Ltd.
- West Japan City Bank, Ltd.
The PoC proposed by these parties includes the verification of the identity through facial recognition technology, and the formal introduction of equipment to issue cash cards immediately, and verify the efficiency of bank affairs and customer convenience, through the following steps:
- Scan face photo data from IC chip such as driver’s license
- Take a customer’s photo with a camera
- Using face authentication technology, confirm the authenticity of the photos taking in the previous steps
The PoC is scheduled to run from April to June 2018.
On May 7, 2018, the FSA announced that the following participants had been accepted into the FinTech PoC Hub:
- Fronteo Corporation, with participating financial institutions
- Mitsubishi UFJ, Ltd.
- Resona Bank, Ltd.
- Yokohama Bank, Ltd.
- SMBC Nikko Securities Co., Ltd.
The PoC focuses on the automation of the checking of various evidence collected for customer suitability throughout the sales process by applying artificial intelligence. This includes “records of reception at the time of sale of financial products created by sales person” and “records of various voices (opinions / offerings) received from customers”. The Fronteo press release includes a detailed explanation (in Japanese). The PoC will run during May and June 2018.