I. Introduction
To enhance the convenience and protection of customers of financial intermediary services, a new financial service intermediary business license system has been created by the recent amendment of the Act on Sales, etc., of Financial Instruments. The law will be renamed the Act on Provision of Financial Services (the “Act”) and the amendments are expected to take effect by the end of 2021.
By obtaining the new license, service providers will be entitled to provide customers a wide range of financial intermediary services flexibly and in harmony with their own business models.
II. Background – Issues under the Existing Regulations on Financial Intermediary Services
Currently, the financial intermediary business is regulated by different laws, depending on the industry, or type of financial intermediary services provided. In particular, for the banking intermediary business, a bank agency service license is required under the Banking Act, while for the insurance intermediary business, insurance agents or brokers must be registered under the Insurance Business Act. As to the security intermediary business, registration of the financial instrument intermediary service is required under the Financial Instruments Exchange Act. Lastly, those engaged in multiple types of financial intermediary businesses, which cut across these different industries, must comply with all the above requirements and the regulations imposed by each applicable law.
Moreover, existing regulations feature a so-called affiliation system. Except for insurance brokers, a financial intermediary service provider must belong to a financial institution that provides financial instruments (i.e., bank, insurance company or a securities company). The financial institution is obligated to instruct and supervise the service provider and will be necessarily liable for any damages to customers caused by such service provider in the operation of its business. From the standpoint of the service provider, it has to subject itself to the strong control and oversight of the financial institution, which reduces the flexibility of its service structure and makes it practically difficult for it to obtain multiple licenses to conduct multiple types of financial intermediary businesses.
The vertical and fragmented license system for the financial service intermediary business has become an issue that has risen to the surface because it has prevented Fintech start-ups from conducting new businesses. For example, some Fintech start-ups have been providing bookkeeping or household accounting apps that collect the financial personal information of customers. They now want to recommend a variety of financial instruments that may be suitable for their customers based on an artificial intelligence (AI)-based analysis of their financial information as a new digital platform business. However, the current legal framework makes it difficult for them to pursue the new business.
III. Features of the New License System
The new financial service intermediary business license will entitle the service provider to mediate financial transactions in different industries between their customers and the different financial institutions. Obtaining just one license through the registration process can create and optimize the use of convenient one-stop shops for a variety of financial services.
The new license system will not adopt the affiliation system. The relationship between the financial intermediary service providers and financial institutions will not be of vertical control but that of an independent and horizontal alliance, which will give service providers an opportunity to customize their services flexibly to fit their own business models.
To compensate for the loss of the advantage of the affiliation system for customer protection, the Act will make special arrangements to prevent harm to customers, including limiting the range of available services, banning custodial services for customer assets, and preserving business security deposits. These regulations, however, might become obstacles to any entry into this business field.
With regard to regulating the conduct of service providers, an activity-based approach will be adopted. The applicable regulations on conduct will vary depending on the financial function and risk of each type of financial intermediary service to be provided. As mentioned earlier, this license was mainly introduced to address the potential needs of Fintech industries, but service providers may make use of this license for face-to-face financial intermediary services, too.
IV. Scope of Business Operations
A “financial service intermediary business” is defined under the Act as the business of providing any banking intermediary services (i.e., intermediary services for deposits, loans or money transfers), insurance intermediary services, securities intermediary services (i.e., intermediary services in primary/secondary securities transactions or investment advisory/management transactions), or money lending intermediary services.
The service provider may mediate financial transactions but not become an agent for the purpose of concluding such transactions, which means that the financial institution must reserve the final decision to make a contract, and the contract for any such financial transaction may not be done on the financial intermediary’s platform.
The scope of financial services that may be provided by financial intermediaries will be limited to those that do not require complicated explanations to customers. The specific types of financial services to be allowed have not yet been announced officially, but the mediation of investment-type insurance contracts and deposit contracts (i.e., those that involve a risk of loss of the principal), including those denominated in foreign currencies as well as derivative transactions, and unlisted stocks and bonds purchase contracts will likely be excluded from the range of available financial intermediary services. If existing insurance agents wish to continue dealing with the above investment-type insurance contracts by using their specialized knowledge and experience, then they must keep their insurance agency registration and obtain the new financial service intermediary registration to provide financial services other than insurance-related services. Existing financial intermediaries may hold dual licenses, i.e., the new license to provide financial intermediary services in addition to their existing ones.
V. Registration System
The license to carry out a financial service intermediary business can be obtained by registration with the Financial Services Agency (“FSA”).2 In applying for the registration, a service provider may choose one, some or all of the types of financial intermediary services that it intends to provide. Generally speaking, as the types of services intended to be provided by the service provider increases, the number of items to be reviewed by the FSA will also increase, in which case, scrutiny of the registration application will likely become stricter. As to registered service providers that want to change or add more types of services, they must change their registration. Service providers should thus carefully consider what types of financial intermediary services they will provide in the future, taking into account their business plan, expertise, time frame, etc., before submitting their registration application. As mentioned earlier, existing intermediaries (e.g., bank agent) may apply for the new license. However, the services covered by their existing license(s) cannot be selected in their applications for registration as financial service intermediaries because of concerns that customers may get confused about the types of their licenses, which differ in terms of the scope of the services and the regulations applicable thereto. Thus, if an existing intermediary obtains registration for a financial service intermediary business that provides a financial intermediary service that is the same with an existing service, then it will lose its existing license or registration. It should thus refrain from selecting any financial intermediary service that is the same as that covered by an existing license.
VI. Financial Requirements
There are no capital or net asset requirements for the registration of a financial service intermediary business. However, in order to secure an amount that would be sufficient to compensate customers for any damages caused in the course of business operations, a certain amount of cash must be preserved as a business security deposit.3 Customers will have a statutory lien on the security deposit for a preferential payment of their claims. As an alternative to the security deposit, guarantee contracts with banks and/or insurance contracts with insurance companies may be opted for instead. The required amount of deposit has not yet been announced. Theoretically, it will vary depending on the risk or scale of the business, so, it will probably be calculated based on the total revenue of the service provider for the past several years.
VII. Regulations on Conduct
The regulations on conduct applicable to the financial service intermediary business consist of (i) common regulations that apply regardless of the type of service provided, and (ii) regulations that apply specific to the type of service provided.
The following are the important common regulations under the Act that apply regardless of the type of service provided: • Prohibition of name lending (Article 21) • Fair and honest business operations (Article 24) • Provision of information (Article 25) • Measures concerning business operations including the fair treatment of customer information (Article 26) • Ban on custodial services of customer assets (Article 27)
The regulations specific to the type of service provided result from the application of existing laws with some modifications, including the Banking Act (e.g., provision of specific information), the Insurance Business Act (e.g., obligation to know and confirm customers’ needs), and the Financial Instruments Exchange Act (e.g., suitability rule and ban on the use of insider information).
Considering current business practices in Japan, the most challenging obligation of financial service intermediaries is the provision of information under Article 25 of the Act. This is because, for the purpose of making economic and business incentives transparent, it includes the obligation to disclose the fees, remuneration and other consideration received by the financial service intermediaries from the financial institutions for the financial intermediary business if requested by a customer. Financial institutions must thus make careful decisions when outsourcing to financial service intermediaries the mediation of certain types of financial instruments with so-called hidden fees, including insurance or loan contracts, and must be ready to disclose the sales fees paid by them to such intermediaries.
Toshiyuki Sawai
