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“Customer Oriented Business Conduct” in the Forthcoming Amendment to the FIEA

NO&T Japan Legal Update

*Please note that this newsletter is for informational purposes only and does not constitute legal advice. In addition, it is based on information as of its date of publication and does not reflect information after such date. In particular, please also note that preliminary reports in this newsletter may differ from current interpretations and practice depending on the nature of the report.

I. Background to the amendment of the laws

On March 14, 2023, the Financial Services Agency of Japan (the “JFSA”) submitted to the Diet a bill (the “Bill”) for partial amendment of the Financial Instruments and Exchange Act of Japan (the “FIEA”) and the Act on Provision of Financial Services of Japan (the “Financial Services Act”). The Bill is expected to amend many matters, including an amendment to the FIEA aimed at ensuring “Customer-Oriented Business Conduct”, and is generally expected to affect companies operating financial businesses (particularly businesses for individual customers) in Japan.

By way of background, this amendment is based on proposals made by the “Interim Report of the Customer-Oriented Task Force of the Working Group on Capital Market Regulations of the Financial System Council” published on December 9, 2022.

The following explanations for this amendment are set forth in the JFSA's explanatory materials for this amendment:

  • The JFSA formulated certain “Principles for Customer-Oriented Business Conduct”, (the “Principles”) pursuant to which efforts have been made to pursue the best interests of customers; and
  • There are, however, many financial business operators that have not adopted these Principles or do not publicly announce their policies for the Customer-Oriented Business Conduct.

In addition, the following points have been raised as issues in the Japanese financial services industry:

  1. In some cases, financial instruments the risks of which are difficult to understand and the costs of which may not be reasonable have been recommended and sold by sellers of financial instruments without sufficient explanation (i.e., issues with respect to sellers of financial instruments);
  2. In some cases, financial instruments are structured and managed with a priority on sales promotion over customer profits (i.e., issues at investment management companies); and
  3. The underuse of investment specialists and inadequate processes for selecting investment institutions (i.e., issues at asset owners such as corporate pensions).

In response to the above issues, the purpose of the Bill is to ensure that relevant businesses are acting in the best interests of customers, and to enhance the provision of information to customers. Some examples of this amendment are as follows.

II. Duty of Best Interest of Customers

This amendment will delete the “Duty of the Good Faith” clause set forth in Article 36, Paragraph 1 of the FIEA, and will stipulate the new clause “Duty of Best Interest” in lieu thereof as Article 2, Paragraph 1 of the amended Financial Services Act.

It has been predicted that the addition of the phrase as “taking into account the best interests of customers, etc.” in the new clause means that financial business operators may have to implement various additional customer-friendly measures.

III. Substantial Accountability

Under this amendment, the FIEA will stipulate that financial instruments business operators shall be obliged to provide tailored explanations to their customers on the basis of their customer’s attributes (i.e., customer’s knowledge, experience, property, and purpose for concluding contracts for financial instruments transactions) (Article 37-3, Paragraph 2 of the amended FIEA).

Any exemption from this obligation will be stipulated in the amended Cabinet Office Ordinance, which will be published in near future.

IV. Change from “Duty to Provide Documentation” to “Duty to Provide Information”

Under the existing FIEA, financial instruments business operators must in principle provide customers with the documents stipulated in the FIEA, such as the Documents Delivered Prior to the Conclusion of a Contract (Article 37-3, Paragraph 1 of the FIEA), the Documents Delivered Upon the Conclusion of a Contract (Article 37-4, Paragraph 1 of the FIEA), the Best Execution Policy (Article 40-2, Paragraph 4 of the FIEA), the Documents explaining that the order has been executed in accordance with its Best Execution Policy, etc. (Article 40-2, Paragraph 5 of the FIEA), and the Investment Report (Article 42-7 of the FIEA).

Under the amendment, there is no further obligation to provide the above documents; instead, it is sufficient to provide the customer with the information contained in such documents, rather than the documents themselves, via methods (i.e., not only providing documents) to be specified by the Cabinet Office Ordinance.

The amended Cabinet Office Ordinance, which specifies the method of providing information, will be published in near future.

V. Conclusion

At present, the timing of enforcement of these amendments is uncertain, but it is important for companies operating financial businesses (particularly businesses for individual customers) in Japan to pay close attention to this trend.

This newsletter is given as general information for reference purposes only and therefore does not constitute our firm’s legal advice. Any opinion stated in this newsletter is a personal view of the author(s) and not our firm’s official view. For any specific matter or legal issue, please do not rely on this newsletter but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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