Foreign Bank Agency Business regime: time to review and repeal

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1 Foreign Bank Agency Business regime: time to review and repeal Background 1. Foreign banks have for many years been serving Japanese customers including leveraging off their global network which is often more extensive than Japanese banks. This potentially allows clients to have access to a wider range of services to support their business expansion but there are major restrictions on what foreign banks can provide and the ease with which they can supply some of these services. 2. Up until 2007 there were no specific provisions in the Japanese banking law that directly governed global banking services including correspondent banking or global cash management. But this changed in 2008 when the Financial Services Agency (FSA) introduced the Foreign Bank Agency Business regime (FBAB). The intention was to put in place regulations that gave greater clarity to cross-border banking services for foreign banks. 3. The new FBAB regime was originally positioned as part of a deregulatory approach but after the regime was rolled out it became apparent that it was far more restrictive than foreign institutions expected. Foreign banks are limited in the services and products that they are able to provide to Japanese customers, even after any approvals are obtained. It is notable to foreign banks how different and restrictive the regime is compared to that in their own countries and in the major other countries in which they operate. Limitations of the regime 4. The regime limits some of the business opportunities for foreign banks and Japanese firms. Below are two illustrative examples of the requirement to get additional regulatory approval to carry out quite straightforward transaction services. And of course if a Japanese institution wanted to avail themselves of an overseas banks products or services that might be suitable to its business but falls outside the Japanese Banking Law, then this would not be in scope at all. Case 1: A Japanese company A wants to centralize its global cash management in Japan. Bank B has the capability to provide world-wide cash management services. Bank B must however obtain FBAB approval first before soliciting potential corporate customers to such services. This is because the global cash management would involve Bank B s global branches or subsidiaries transacting with company A s business sites in other countries including opening bank accounts, and crediting or debiting from accounts. 1

2 Case 2: Japanese company A s head office and foreign bank B have transactions in Japan. Company A s subsidiary in country C wants to start transacting with Bank B s branch or subsidiary in country C. Company A s head office wants to directly negotiate with Bank B in Japan on behalf of its subsidiary in country C because Company A s head office is the decision-making body. But, such a negotiation would not be permissible unless FBAB approval is obtained by Bank B with regards to the subsidiary business in country C. Rationale 5. The rationale of the regime appears to treat other parts of a group s entity as a completely unrelated entity. (This is an artifact in many ways of the Japanese Banking Law). The FSA checks the regulatory framework of the home country of the HQ and the home country of the relevant branch or subsidiary and the equivalency of products or services to be offered in light of Japanese regulations. But in reality firms are part of a group, with group wide risk management schemes, funding, management etc. For other parts of the regulatory environment the FSA relies on this type of group-wide capacity (e.g. for capital requirement purposes) and co-operation with other regulators, but for FBAB related activities this does not appear to be the case. This is not the case in other countries; they rely on their usual prudential and supervisory approach. Japan appears alone in requiring a two-step registration process and it is not clear to market participants and many commentators why this is the case. Tokyo as a financial centre and the support of Abenomics 6. Tokyo is attempting to promote itself as an international financial centre but this regime is a major hindrance. In terms of financial regulatory barriers it is one of the most significant barriers to the promotion of the market. The regime restricts foreign banks from effectively serving Japanese retail and corporate customers. This has a number of negative effects including lost opportunities for Japanese companies and a possible knock on effect on the macro-economic environment. This therefore appears inconsistent with the Government s desire to create an environment for inbound and outbound business, to help the vitalization of the Japanese economy. Maintaining consumer protection 7. Consumer protection is an important goal which IBA Japan strongly believes in (it is an important reputational issue) and it is of course also an important consideration to regulators, consumers and market practitioners in both Japan and other jurisdictions. Regulators in other markets with foreign bank branches and subsidiaries employ a number of ways to protect consumers, but do not have an equivalent foreign bank agency regime. 2

3 8. In terms of prudential soundness many jurisdictions tackle this as part of the initial application and take account of issues such as the equivalency of the home country s supervision as well as types of business to be conducted (e.g. whether they are simple or complex, or safe or more risky etc). In some countries there are greater protections for different types of consumers (e.g. in Australia, foreign bank branches cannot accept deposits of less than A$250,000 ruling out less affluent consumers) or restrictions in the groups they can sell to depending on risk profiles or income levels (e.g. in Singapore foreign bank branches can only offer products or services of their overseas affiliate banks if the customers have net assets over a certain threshold) or the difference between corporate and retail customers. Other methods employed include: disclosure requirements, different standards depending on the level of complexity of products (e.g. between plain deposits and structured deposits); staff training; overseas staff accompanied visits by local staff; guidelines for financial promotions; and ongoing supervision and data reporting (e.g. of liquidity positions). A key strategy employed by regulators in many countries is a risk-based approach including taking account of some of the factors mentioned above. Time for a change and to repeal the regime 9. For the reasons outlined above IBA Japan (and a number of foreign governments) believe it is now time for the FBAB in Japan to be reviewed with the view of repealing it. We have noted that a similar two stage-registration process does not occur in any other major developed country. Below we set out the research we have undertaken to support this statement. IBA Japan s survey of regulations in other countries 10. IBA Japan conducted a survey on regulations governing cross-border banking services in 12 countries during autumn 2014 using our global network of member firms 1. We carefully evaluated each response and could not find any indication of a jurisdiction having a regime similar to the FBAB. Major developed countries seem to have a more flexible and single stage registration approach. 11. The major result of the research is that major jurisdictions have a single unified bank licensing system without requiring additional license for cross-border banking services. In reporting this information to the FSA it would be obviously easier to point to specific pieces of regulation to prove our point. But where none exists (e.g. a secondary approval system) this is obviously not possible. 12. The main points we have noted from our survey are: Foreign banks in nearly all countries are required to obtain a banking license and this does not prohibit the provision of services for customers from outside the jurisdiction. 1 Australia, Canada, China, France, Germany, Hong Kong, Korea, Singapore, Switzerland, Taiwan, UK, and U.S. 3

4 Once a banking license has been obtained, we found in nearly all cases in the countries we surveyed foreign banks are permitted to conduct cross-border banking business 2. We did not come across examples of regimes similar to that Japan, that require a secondary license necessary for cross-border banking(although there can be some restrictions on what is allowed as part of the initial licensing). 13. The Japanese FBAB regime seems like an outlier by: Distinguishing cross-border banking from domestic or onshore banking. Treating foreign bank s offshore affiliates almost like a third party rather than part of a firm s banking group. Retrospective questioning the legality of cross-border banking. (Foreign firms cross-border activities prior to the introduction of FBAB in 2007 have been queried). Requiring a secondary license which is only granted after doing a fundamental review of offshore affiliates overall profile and products. Banking license requirement for foreign banks Below are some examples of some major themes from the survey. 14. Within a number of countries (e.g. France, Germany, Singapore) foreign banks can provide customer with services, without establishing themselves as a branch or subsidiary, from outside their jurisdiction when this is requested by the customer; this is known as freedom to provide requested services. If firms want to market their products and services and solicit customers, foreign banks are required to establish a branch or a subsidiary and obtain a banking license (but require no further licensing requirements) from the host regulator so that they can serve customers in the host country, either within or from outside the country. 15. We did not find any country that required additional license for delivering cross-border services, on top of the initial banking license. The amount of responsibility the local branch may undertake may vary and there are various levels of legal interpretation. Australia s approach is one of the most flexible. A foreign bank s branch is allowed to act on behalf of its head office and other branches of the group which are based in a third country, without having to obtain additional license. This is because the branch in Australia and its head office and other entities are viewed as a single legal entity and therefore the local entity is seen as responsible for services provided by the whole group to customers in Australia. Restrictions on Head Office staff visiting customers in the host country 16. We found a range of situations about head office staff visiting customers in the host country and there were restrictions in some countries. For example, in Canada, Singapore, and UK, 2 In HK a bank branch can act as an agent/intermediary of its HQ and other branches but not a subsidiary which is part of its group. 4

5 Head Office staff have to be either accompanied by licensed branch staff or alternatively they are allowed only to make a non-business courtesy call. These requirements however are not enforced by a second level of approvals they are an integral part of the initial licensing and conduct regime. In Japan there are more severe restrictions: HQ staff are only allowed to meet customers when local branch staff are present even after an FBAB license has been granted; HQ staff are not permitted to take the lead. Advantages that other countries benefit from 17. The simple unified approval system allows global banks to serve customers in the host country with a range of products and services from across their network and thereby contribute to vibrant financial and economic activities within these countries. This therefore appears to put firms and consumers in Japan at a disadvantage as they are not able to take advantage of this situation. The regulators in these jurisdictions also appear to be content that their approach (which includes a number of conduct requirements) has the appropriate safeguards in place to protect their domestic consumers. Conclusion 18. IBA Japan (and others) believe now is an appropriate time to review and repeal the FBAB regime. Under the government s Abenomics agenda it will help to vitalize the economy by providing a wider range of services which are easier to supply to Japanese consumers. It will also put Tokyo on a more equal footing with some of the countries it hopes to compete with as a financial centre and also will remove regulatory burdens which do not exist for foreign banks (including Japanese institutions) operating in other countries. 5