The sharks are circling. With a large proportion of the estimated ¥1,500 trillion ($13.1 trillion) in Japanese household savings set to be unleashed on the investment trusts market, the number of unregistered and unregulated funds in Japan has grown rapidly. The country’s Financial Services Agency is worried that inexperienced amateur investors could get into trouble, and has included in its wide-ranging new Financial Instruments and Exchange Law (FIEL) measures designed to police the industry and curb aggressive sales tactics.
The law, which came into effect at the end of September, requires any collective investment scheme catering to amateur investors to register with the FSA and to provide it with information on the fund’s manager(s), balance sheet, location and activities. Funds catering to general investors will have six months to comply; those that cater to professional investors need only notify the FSA of their existence within three months of the law taking effect. After the grace period is over, unregistered funds continuing to sell to general investors can expect punitive measures, says Shiro Okita, a deputy director in the financial markets division at the FSA. "If funds selling to amateur investors have not registered with us within six months, then we have the power to go and inspect them," he says. "If we find anything illegal happening we can penalize them, require them to change their methods or in extreme cases close them down."
The law also contains stringent instructions on how the financial services industry can market investment products. The FSA has a list of more than 40 "unlicensed or unregistered cold-callers" on its website, and in an effort to curb the practice it now requires sales staff to secure a customer’s agreement to be solicited before any pitch can be made. Some bankers in Tokyo have complained in private to Euromoney that the additional workload generated by the new law will prove to be extremely costly and will damage Tokyo’s position as a financial centre.
"They’re killing the market," says an investment banker at a foreign institution. "We’re required to keep records of the customer’s agreement to be sold to for five years, and other documents related to sales for up to 10 years. There will be a huge increase in workload, and in IT costs."
Under FIEL, advertisements for investment products are now required to carry lengthy disclaimers highlighting their potential downside; local press reports suggest many banks have been frantically pulping sales material created before they became aware of the law, or simply cancelling their campaigns.
Although the FSA’s Okita concedes that FIEL will generate additional costs for the whole financial industry in Japan, he believes that the long-term benefits will vindicate the regulator’s actions.
"We want the Japanese financial industry to become clearer and fairer, and we also hope to see Japan play a larger role in the worldwide market," he says. "It’s true that sometimes these needs will clash but overall I think that if we can create a more transparent and ordered market then investor confidence will rise and Japan and its financial services industry will benefit too."