Japan prepares æNo ActionÆ law

Rules should make regulation of securities industry open û but no one has seen the actual proposal.

Navigating Japan’s byzantine regulatory system is a murky, frustrating and costly endeavour for any foreign business, whether in financial services, telecoms, pharmaceuticals or automobiles. The written laws are often modelled or simply copied from third countries, but the translation ends up vague or ambiguous, leaving various ministries wide scope to interpret these laws and draft ordinances – an opportunity they have always seized. These rules tend to be inflexible and difficult for foreign businesses to interpret.

The same problems have confronted Japanese companies, but at least as far as financial services go, in the days before Big Bang, a company could reach a gentleman’s agreement with the pertinent regulator. Foreign companies lack the necessary access. Also, it is normal for Japanese bureaucrats to rotate among offices or ministries every two or three years, making an informal agreement difficult to sustain.

Under pressure from the United States government as well as members of its own private sector, Japanese regulators have come to appreciate the merits of the ‘no-action letter’ process followed by the US Securities and Exchange Commission. If a firm wishes to, say, introduce a new product, the SEC will issue in writing, publicly, if it will take ‘no action’ against such a new product; this may include outlining under what circumstances the SEC would initiate legal proceedings. This system lets everyone know if doing something new is kosher as the authorities see it. “You ask a question in writing, and you get an answer,” explains a Tokyo-based foreign banker.

In Japan, such simple steps aren’t taken – but now they may be. The Financial Services Agency, Japan’s equivalent of the SEC, has pledged to allow the industry to regulate itself more, and to foster a more transparent regulatory environment. And broadly, the recently amalgamated Ministry of Public Management, Home Affairs, Posts and Telecommunications, known colloquially as Soumusho, last week accepted public comments from all sectors including financial services about what the broad principles for regulators should be. Soumusho is acting as a coordinator among all ministries on this issue, and is expected to pass a final proposal to the cabinet by the end of this month. By April, Japan should have a new ‘no-action’ law.

Foreign bankers say their submissions to Soumusho laid out their basic demands. One is for ministries or agencies – for bankers, the key ones are FSA and the tax authorities – to identify their key points of contact. “We spend months being shuffled from person to person when we have a question,” says a banker. Second, regulators must protect confidential information. “If we go to a regulator about a new financial product we want to offer, we don’t want to see it on the front page of the Nikkei Daily the next day,” says the banker, who adds this has happened to his firm more than once.

Third, bankers want no-action letters published. If one firm asks a question, today they alone will get an answer. But many firms may be working on similar products and will continue to waste time and resources trying to read the bureaucratic tea leaves. If the rules apply equally to everybody, then publish them, bankers argue.

Fourth, the no-action letter should apply broadly. Banks don’t want to adhere to the spirit of a no-action letter but get fouled by overzealous, nit-picking bureaucrats. And fifth, they ask the regulators to provide speedy responses.

Although bankers are generally pleased that the government intends to adopt the no-action process, they are concerned about the opaque manner in which it is being done. Soumusho apparently has a proposal ready to send to the cabinet, waiting only for comments. But why hasn’t this been shown to the private sector, particularly when FSA and others are giving lip service to the glories of transparency?

A second concern is that the ultimate effect will be a step backward, not forward. “It could prove to be a straightjacket if the rules are too detailed,” says a banker, “if it stipulates things like who can apply for a no-action letter or about what kind of laws can be questioned. For example, we don’t want to see a law that could be interpreted to mean that a particular company or kind of product or kind of question isn’t covered by the law, barring them from requesting a no-action letter. We don’t want a law that maximizes the discretionary powers of the bureaucrats.”

If, however, the cabinet approves a good law – it’s expected to do so by the 31st – then this will be a good day for Japan. It will prove a concrete step toward an open, transparent and fair regulatory system, not just for financial services companies but for all companies, domestic and foreign, operating in Japan.

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