The Financial Services Agency is laying the groundwork for a regulatory overhaul that could lead to a shake-up in Japan’s ¥1 quadrillion banking industry.
The agency is examining how to change the legal framework so that all providers of financial services are subject to the same rules — a move that would allow emerging companies such as technology startups to compete directly with traditional financial institutions.
For banks, the revamp could end their monopoly on deposit-taking and lending but also free them up to enter new businesses.
Emerging technologies have blurred the boundaries between providers of financial services and made it harder to maintain separate regulations for different types of companies in the industry, according to financial services minister Taro Aso.
Shifting from rules that are focused on entities — banks, insurers and other institutions — to one based on functions would make the industry more competitive and adaptable, Aso told reporters last week.
“We can strengthen the competitiveness of finance in Japan so that companies are free to select from diverse business models,” he said. “This will encourage imagination, creativity and ingenuity from financial institutions and new entrants.”
Financial institutions worldwide are being disrupted by companies that provide services ranging from digital payments to remittances using smartphones.
The Bank for International Settlements said in a report this month that regulators may need to reassess their supervisory approach to adapt to changing business models driven by technology. Japan trailed all but one of 20 markets on adoption of “fintech” (financial technology) last year, according to a report by consulting firm EY.
“The financial industry is being forced to rethink what it is with the emergence of fintech,” said Ryoji Yoshizawa, an analyst at S&P Global Ratings in Tokyo. “Finance should be behind the scenes of the real economy, and the time for the industry to change in line with real business has arrived.”
Japanese banks are trying to diversify into areas such as asset management, as near record-low interest rates and tepid loan demand undermine their traditional lending model. There is scope for technology to play an increasing role as the nation’s households look for ways to invest more of their $17 trillion in financial assets.
The most promising fintech companies would benefit from being allowed to compete on the same playing field as established financial institutions, according to analyst Tsuneharu Miyake.
“This will be a historic turning point not seen since the beginning of banking regulation in Japan,” said Miyake, head of financial research at Mizuho Research Institute. Emerging firms “that are capable of disciplining themselves to abide by the laws will have the best chance.”
Like other nations, Japan has seen a plethora of fintech startups emerge in recent years, ranging from robot investing adviser WealthNavi Inc. to personal finance manager Moneytree K.K. Foreign companies such as Chinese mobile payments giant Ant Financial Services Co. and U.K. remittance venture TransferWise Ltd. have also entered the nation.
The FSA is considering new rules around four key functions: settlements, credit, investing and risk transfer. It’s seeking to ensure customers are amply protected while allowing the flexibility for a range of enterprises to develop new financial services.
A panel consisting mainly of academics began meeting late last year to discuss the overhaul, which Aso said will take “a considerable amount of time.” The group concluded submissions of expert opinions on the four functions at its most recent meeting Feb. 9, public records of the gathering show.
One issue that has emerged as a key area of debate is how to handle deposits. Under current law, banks are licensed to take deposits that are guaranteed if they fail. Some panel members have warned that if deposit business is opened up to competition from nonbanks, this could lead to a breakdown of credit creation, according to the documents.
The FSA has already made moves to free up what banks are allowed to do under the current law. In 2016, it amended legislation to allow lenders to take larger stakes in fintech firms. Last year, the regulator introduced a registration system for cryptocurrency exchanges.
Banks, whose assets totaled ¥1.089 quadrillion as of March 2017, are cautious about the changes. The deliberations so far strike a balance between encouraging innovation and ensuring security, Japanese Bankers Association Chairman Nobuyuki Hirano told reporters in January. Still, he added, the rules “have the potential to have a large impact on banks’ business models and strategy.”