As the government’s “Big Bang” financial deregulation moves into full gear, there is growing concern among lawyers that there has been one-sided emphasis on consumer responsibility for making investments at their own risk.
The December start of sales of investment trusts at counters of major banks nationwide underlines the need for retailers to provide full explanations of their financial products to customers, the lawyers say.
On Dec. 1, financial authorities eased regulation on the sale of investment trusts. Allowing banks and insurers to sell such products is a key step of the Big Bang deregulation, following the revision of the Foreign Exchange and Foreign Trade Control Law last April.
Although investment trusts had already been available at bank counters since December 1997, they were handled by investment trust companies, which sold such products by renting floor space from affiliate banks.
Investment trusts, similar to mutual funds in the United States, are considered a major vehicle for managing the personal financial assets held by the Japanese public, roughly estimated to total 1.2 quadrillion yen.
In all, more than 4,500 kinds of investment trusts are believed to be available on the Japanese market from brokerages, investment trusts firms, banks and insurance companies.
While an increasing number of consumers acknowledge the need to take their own investment risks, investment trust retailers must provide the basis of fair judgment, argues Yutaka Ishitoya, a lawyer engaged in protecting investors from ambiguous marketing of financial products. “Investment trusts made available at bank counters may give the impression that they are as safe as bank deposits,” Ishitoya said. “This is because many consumers have little confidence in investment trusts sold by brokerages.”
Many investors lavishly bought investment trusts from brokerages during the robust economic period of the late 1980s and suffered large losses after the economy began to slow down. “That makes it even more necessary for banks to explain the risks involved (in purchasing investment trusts), but they don’t seem to mind whether customers (fully) understand the nature of such products or not,” Ishitoya said.
Although investment trust purchasers can expect large returns on their investments, unlike bank deposits, the principal is not guaranteed.
Trust funds are managed by investment trust firms — not the banks selling the products — and the money pooled is invested in a variety of securities and bonds, including high-risk, high-return foreign shares and bonds.
Ishitoya, who in 1993 launched a consumers’ hotline for problems involving securities transactions, warned of the possible dangers in purchasing investment trusts without basic knowledge. “In a symbolic case reported in March 1997, a 76-year-old woman lost 2.5 million yen after being advised by a brokerage to purchase foreign investment trusts, worth 10 million yen,” he said. “She said she was assured her investment would be safe.”
It later became clear, however, that the type of investment trust she bought was a “corporate type” fund involving risky foreign corporate stocks. Even the salesman in charge was unaware of the product’s nature, Ishitoya said. “It is true that investors need to become more responsible for their own investments,” he said. “But where has the responsibility of trust fund retailers gone?”
Major banks that launched sales of investment trusts Dec. 1 have been divided into two camps, with each retaining different sales strategies for managing the estimated 1.2 quadrillion yen in personal financial assets.
Sakura Bank, Sumitomo Bank and Fuji Bank have boasted a wide variety of products. Fuji offers 19 trust funds while Sakura and Sumitomo each have 24, the largest lineup among the nation’s major banks, according to officials at the banks.
Among these trust funds, some are invested in foreign stock and bond markets and thus recommended for only experienced investors who can choose investment plans that suit their needs, the officials said.
The banking industry’s risk benchmark for Sumitomo’s products ranges from RR1, which involves the least investment risk, to RR5, a high-risk, high-return type. The highest risk rate for investment trusts sold by Sakura and Fuji is RR4.
Meanwhile, banks in the other camp take a more cautious approach by offering a limited number of investment trusts developed and managed by affiliate financial institutions.
Dai-Ichi Kangyo Bank, for instance, has limited the number of its investment fund products to five. The investment plans of these products are designed by DKB’s affiliate, which specializes in asset management, according to DKB officials.
Instead of offering customers too many products to choose from, DKB aims to offer only trust funds that it can fully explain to customers, the officials said.
Meanwhile, insurance companies — the financial institutions apart from banks that are now allowed to retail investment trusts — are also striving to establish sales channels of their own.
Since insurance firms, both life and nonlife, have a limited number of branch offices compared with banks, some insurers aim to reinforce their sales workforce, while others will soon introduce investment trust sales via telephone, industry sources said.
While banks and insurers strive to grasp new business opportunities under the latest deregulation measures, many lawyers are urging financial authorities to establish rules to safeguard investors against questionable marketing tactics.
“Investment trusts are completely new to salespeople at banks and insurers,” Ishitoya said. “I wonder if these retailers can really provide customers with a thorough explanation of their products.”
Article 12 of the Banking Law makes it mandatory for banks selling investment trusts to explain to investors that the principal is not guaranteed like deposits.
“That single article alone would hardly be sufficient,” Ishitoya pointed out. “Most of the problems reported are related to insufficient asset-management consulting after the sale (of the product).”