Further Deregulation in Banking Sector - International Law Office

Sale of Insurance Products by Banks
Expansion of Banking Sales Channels

There has recently been a trend towards banking deregulation in Japan. This primarily involves the expansion of the types of financial products that banks are permitted to handle over the counter, as well as a greater number of sales channels that are available to banks (for further details please see "Recent Trends in Deregulation of Banks"). Moreover, amendments have recently been made to the legal framework surrounding these issues.

Sale of Insurance Products

The Insurance Business Law Enforcement Regulations were amended in July 2005 (they were promulgated on July 8 2005 and enforced on December 22 2005, except certain provisions). Some notable changes have been made in relation to the sale of insurance products by banks. In particular, the types of insurance products that banks and certain financial institutions can sell have been increased, and measures to prevent adverse effects arising from this change have been taken.

Types of insurance products
As of December 22 2005 banks may sell the following insurance products:

• single-premium whole life insurance, regular premium payment type endowment insurance with insurance periods of 10 years or less (excluding corporate contracts) and single-premium endowment insurance;
  
  
• personal non-life damage insurance (excluding business-related insurance) other than automobile insurance, that is not a group contract and does not accumulate savings; and
  
  
• savings accumulating accident insurance.

As of December 22 2007 banks will be able to sell all insurance products. However, this date may be revised, if necessary, to protect policyholders (among others).

Measures to prevent adverse effects
A number of new regulations have been established in order to prevent adverse effects arising from the banks' ability to sell insurance products. These measures include the following:

• Banks wishing to sell insurance products must implement appropriate measures to ensure that the insurance products are not sold for a commission or any other remuneration to any company or its representatives, or to a policyholder or insured person, if the bank provides business financing to them (ie, a restriction on the type of entities to which banks can sell insurance products);
  
  
• Banks wishing to sell insurance products must ensure that those responsible for granting loans to businesses do not attempt to sell insurance products;
  
  
• Banks wishing to sell insurance products must not sell these products to a customer or a person close to this customer (ie, the company representative if the customer is a company, or the company itself if the customer is a company representative and the financing represents a loan of funds necessary for the company's business) where the bank knows that the customer is applying for a loan; and
  
  
• Banks wishing to sell insurance products must take all relevant measures to confirm that they are permitted to sell insurance to a customer and to ensure that insurance sales do not interfere with the other operations of the bank.

In relation to the first two measures, special measures exist for smaller financial institutions, such as regional banks and shinkin banks.

Expansion of Banking Sales Channels

The Banking Law was amended in November 2005; it was promulgated on November 2 2005 and should enter into force within one year of that date (expected on April 1 2006). The regulatory framework for bank agents has been amended. These amendments concern, among other things, funding, concurrent businesses and the types of agency services that can be performed. In short, these changes consist of an expansion of the sales channels available to banks. As a result, supermarkets and convenience stores, among others, may now legally act as bank agency businesses.

Abolition of funding restrictions and permit system
Following the amendment of the Banking Law, the bank agents system was abolished and the requirement for bank agents to be whole subsidiaries of banks has been removed. Instead, the 'bank agency business' concept has been established. Conducting a bank agency business involves mediating or acting as agent for the conclusion of any agreements relating to the taking of deposits or term deposits, lending, discounting of notes or exchange trading on behalf of banks.(1) It will require permission from the prime minister.(2) Banks themselves will not be subject to this permit system and will thus be able to operate a bank agency businesses without requiring this permit.(3)

Moreover, prohibited activities - such as cross-selling between the person conducting the bank agency business and its client - have been codified.(4) Among other things, the law prohibits a bank agency business operator from attaching certain conditions to the performance of mediation for the conclusion of agreements relating to lending or discounting of notes on behalf of banks - for example, the condition that the client must enter into transactions in relation to other activities of the bank agency business, the business activities of its subsidiaries or any person with a close relationship to the bank agency business.

The law also specifies that, as a general rule, the bank on behalf of which the bank agency business acts is liable for damages incurred by clients as a result of the agency activities of the bank agency business.(5)

Restrictions on concurrent businesses
A bank agency business may also perform activities other than bank agency business activities and "activities incidental thereto",(6) subject to approval by the prime minister. If concurrent activities are listed on the application form at the time of application for a bank agency permit, the bank will be treated as being allowed to perform these activities, subject to obtaining the permit.(7) If a bank agency business later wishes to operate a new kind of concurrent business, it will require separate approval under Article 52(42), Paragraph 4 of the law.

Under Article 52(43) of the law, a bank agency business must manage the assets of its clients separately from its own assets.

Restrictions on agency activities
Once an entity has been allowed to act as a bank agency business, it may mediate or act as agent for agreements relating to the taking of deposits and term deposits, loans, discounting notes, exchange trading on behalf of banks and other activities incidental to the bank agency business. It is believed that the incidental activities of a bank agency business will include the mediation of banks' incidental activities described in Article 10, Paragraph 2 of the law.

For further information on this topic please contact Hiroo Atsumi at ATSUMI & Partners by telephone (+81 3 5501 2111) or by fax (+81 3 5501 2211) or by email (h.atsumi@apap.gr.jp).

Endnotes

(1) Article 2, Paragraph 14 of the Banking Law.

(2) Article 52(36), Paragraph 1 of the law.

(3) Article 52(61) of the law.

(4) Article 52(45) of the law.

(5) Article 52(59) of the law.

(6) Article 52(42), Paragraph 1 of the law.

(7) Article 52(42), Paragraph 4 of the law.