The Financial Services Agency began on-site inspections of Bigmotor and Sompo Japan Insurance on Tuesday, aiming to dig deeper into the insurance fraud scandal by the leading used-car dealership chain.

FSA officials will be stationed in Sompo Japan's Shinjuku headquarters and Bigmotor's branch in the city of Tama in Tokyo, where the firm is planning to move its headquarters, with the investigation likely to take several months. Bigmotor’s Tama branch is also overseeing the company's insurance agency business.

Based on the investigation, the FSA will consider whether to impose an administrative order, which could include instructing the two companies to draft a business improvement plan.

As dozens of Sompo Japan workers have been seconded to Bigmotor, one focus of the investigation is how much the insurance firm knew about Bigmotor’s actions. The used-car dealer intentionally damaged customers’ vehicles, inflated repair costs and made fraudulent insurance claims.

“The top priority is to find out what was happening,” said Finance Minister Shunichi Suzuki, who also oversees the FSA, during a news conference on Tuesday.

“We will respond to inspections in a sincere manner and strive to help affected customers,” Sompo Japan said in a statement the same day.

Earlier this month, Sompo Japan President Giichi Shirakawa announced that he will step down to take responsibility for having advocated for reviving business ties with Bigmotor even though he knew of allegations of possible misconduct.

In June last year, major insurers, including Sompo Japan, stopped sending their customers who needed to repair damaged vehicles to Bigmotor after whistleblowers flagged inappropriate practices by the used-car dealership chain. But only Sompo Japan resumed business with Bigmotor the following month with Shirakawa having stressed the need to do so.

During a news conference on Sept. 8, Shirakawa admitted that it was “a grave management mistake,” saying that he'd thought it was important to maintain business ties with Bigmotor.

Sompo Holdings, Sompo Japan’s parent, said it had set up an outside investigation committee to look into the issue.

Sompo Holdings CEO Kengo Sakurada said he would not resign for now and wait for the results of the investigation. Sakurada was also the chairman of Keizai Doyukai, one of Japan's most powerful business lobbying bodies, until April.

The Bigmotor scandal came to light in July after the used-car dealer disclosed a third-party investigation report that revealed at least 1,275 cases of improper repairs by employees at body and paint shops. These involved using screwdrivers and sandpaper to scratch car bodies, hitting vehicles with golf ball-filled socks and doing unnecessary paint work.

Such actions allowed Bigmotor employees to charge excessive repair fees and make fraudulent insurance claims. The 1,275 inappropriate cases make up nearly 15% of the 8,427 insurance claims made since November 2022. The average excess paid by vehicle owners was about ¥39,000 per case.

The report pointed to several root causes of the scandal, such as setting unreasonable business goals, failing to listen to front-line employees, a lack of corporate governance and insufficient awareness of compliance measures.

While the company has denied any direct involvement from top management, then-Bigmotor President Hiroyuki Kaneshige resigned from his post.

Although new President Shinji Izumi, a former executive, vowed to reform the corporate culture and regain trust, the outlook for the company appears uncertain, with the scandal weighing heavily on the business. Bigmotor is seeking a drastic turnaround plan, even considering a possible sale.

According to a report by Teikoku Databank, a market research firm, the value of sales in Japan’s used-car market reached a record high of ¥3.9 trillion in fiscal 2022, which ended in March, and Bigmotor boasted the top market share, at about 15%.

The possible ripple effects of the Bigmotor scandal on the used car market overall is worrisome. "It’s concerning that consumers share a sense of distrust toward (used-car dealers), which might subdue demand for used cars,” the report said.

Information from Kyodo added