Regulatory Developments Despite considerable growth in the asset management industry in Japan over the past years, due mainly to the liberalisation of the sales channels for funds, the Japanese Government continues to unduly restrain the operation of asset management companies. Rules governing the types of securities that asset managers may deal in are much more restrictive than in other global markets. Moreover, the approach to licensing remains inconsistent, with a variety of bodies issuing regulations and thereby driving up compliance costs. The creation of a new Financial Instruments and Exchange Law (FIEL) did not result in the consolidation of the two separate Trust Management and Investment Advisory Laws, although it became easier to obtain a sub-license after the law was introduced. Obstacles remain to the sales and service of offshore funds, inhibiting firms from taking a proactive approach to marketing the offshore products of their affiliates. There have been some bright spots, such as changes in the corporate pension system in 2001 and legislation introduced in 2003 allowing Japan Post to delegate fund management, but more regulatory reform is needed before asset management companies can operate effectively and efficiently for the benefit of Japanese consumers. The licensing system is in need of urgent reform to ensure more consistency and transparency in the application process. The Financial Services Agency (FSA) and the Ministry of Finance (MOF) Bureaus have been reluctant to define and disclose the types of side-business that applicants may conduct. Restrictions on side business licences have in general been relaxed since the introduction of the Financial Instrument and Exchange Law in 2007, but different firms have received different authorisations, depending on the scope of the application submitted, even though the underlying business objectives do not differ substantially between firms. This lack of regulatory consistency calls into question the supposed neutrality of the regulatory environment and makes it difficult for firms to pursue new business opportunities for fear of non-compliance. The EBC is disappointed that the creation of the Financial Instruments and Exchange Law (FIEL) did not address the problems of multiple rules and regulators. Although it was supposed to become a comprehensive law for all financial services, the FIEL does not incorporate the Investment Advisory Service Law and the Investment Trust Law. Prospects for EU-Japan Economic Integration Professional management of pooled assets is becoming increasingly important in Japan, as the financial basis of the social security system steadily weakens. With the birth-rate at its lowest level ever and the post-war baby-boom generation starting to retire, even a sustained economic upturn with a potentially increased tax base would be unlikely to reverse the trend of decreasing revenues. This is happening at a time when interest rates have remained at historically low levels for a long period, causing a clear shift in the market from a strong preference for traditional savings in bank (or post) accounts to an increased appetite for products with the potential for higher returns. By providing professional advice and innovative services in an increasingly complex market, global professional asset management companies can contribute to the more effective allocation of resources in the economy at large. Currently, financial services companies cannot provide clients with the same trust management and investment advisory services in Japan as they do in Europe due to strict firewall and severe license restrictions. The result of regulatory barriers is inefficiencies in resource allocation in the economy as a whole and less than optimal return on capital. Without a joint framework extending to all financial services, European and Japanese financial services companies will never be able to fully integrate their European and Japan operations and will continuously be restrained in providing the same products on both markets. Priorities
Key Issues and Recommendations ■ Creation of a single regulator for asset management Yearly status report: limited progress. Although the businesses of investment trust management and investment advisory services do not differ in content, these businesses require separate licensing, filing and customer disclosure requirements. The EBC is disappointed that the new Financial Instruments and Exchange Law (FIEL), which passed the Diet in May 2006, fails to truly integrate the competing legal frameworks governing the asset management industry. A transfer of supervision authority from the Ministry of Finance (MOF) to the Financial Services Agency (FSA) is likely to lead to the merger of the Japan Investment Trust Association (JITA), and the Japan Securities Investment Advisers Association (JSIAA). Recommendation:
■ Reporting requirements for publicly traded funds Yearly status report: limited progress. A revision to the Securities Exchange Law in 2006 altered the reporting system for professional investors, requiring them to report within five working days if their own stake in a listed company exceeds 5% of total stock and every second week in regards to the consolidated holdings of the whole financial group. When applied to asset management companies, this imposes not only a significant new administrative burden, but also requires sharing of customer information with other companies in the same financial group, which is strictly forbidden under the very same law. The EBC believes that discretionary investment advisors and investment trust managers should be treated differently from activist professional investors, and allowed to continue to report their share holdings once every three months and within 15 days when acquiring a more than 5% stake in a listed company. Recommendation:
■ Improve transparency by revising inspection practices Yearly status report: new issues. Firms inspected by the FSA usually have very little leeway for discussions and explanations when under inspection. The regulated entities are generally advised to agree with the conclusions of the inspectors, since failure to agree is deemed by the FSA to demonstrate a "lack of compliance consciousness", warranting harsher sanctions against the regulated entity itself, in addition to the usual guidance to the entity on appropriately punishing any employee responsible for infractions. The inspectors revisit other observations and increase the severity of their conclusions until the regulated entity agrees with their findings. Generally, because of these practices, regulated entities agree even when the findings conflict with their own conclusions and those of their outside advisors. Such a situation does nothing to advance understanding and transparency in financial regulation. Moreover, since the regulated entity is then ordered by the FSA not to discuss the contents of its inspection with any third party, the only public record is an announcement of the sanction on the FSA's website, offering insufficient detail to allow other regulated entities to understand what has happened. Recommendation:
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