On 5 June 2020 a bill to revise the Act on Sales, etc of Financial Instruments to increase convenience and protect users of financial services, known as the Financial Service Intermediary Act, passed the Diet. The bill, which is expected to be enacted by the end of 2021, will amend the Act on Sales, etc of Financial Instruments and introduce a new financial service intermediary system.
This article sets out what the new act will mean for insurers, insurance agents and brokers.
Until now, businesses that provide financial services (eg, banking, insurance and securities services) have been regulated under different legislation. In order to carry out multiple financial intermediary services, multiple qualifications were required.
However, by the end of 2021, the bill will enable intermediaries to mediate services in various fields, including insurance, by obtaining one registration, allowing those entities to act as one-stop shops for financial services.
In creating this new system, the Act on Sales, etc of Financial Instruments, which until now mainly established civil rules concerning the sale of financial products, was renamed the Act on the Provision of Financial Services (APFS). The provisions regarding the financial service intermediary system will be established in this renamed act.
The financial service intermediary system was established in response to the growing need for financial services to be provided online. However, this system does not exclude face-to-face financial service intermediation.
Scope of operations that can be conducted by financial service intermediary businesses
A 'financial service intermediary business' is defined as a business that performs certain financial services, including insurance intermediary services.
Financial services that require highly specialised explanations for customers are excluded from the services that can be provided by a financial service intermediary business. The exact details are scheduled to be specified in a cabinet order. For instance, insurance contracts denominated in foreign currencies are expected to be excluded from the subject of intermediary services.
Financial service intermediary registration system
Registration with the prime minister is required for conducting any financial service intermediary business (Article 12 of the APFS). Parties that have obtained this registration are called financial service intermediaries (Article 11, Paragraph 6 of the APFS).
The registration application documents must describe the type of business (Article 13(1), Item 4 of the APFS). In other words, when registering as a financial service intermediary business, it is not essential to perform all types of intermediary business (ie, deposit intermediary business, insurance intermediary business, securities brokerage business and money lending intermediary business); rather, it is sufficient to list only the types of business conducted. If a registered financial service intermediary intends to change the types of business conducted (or add any new types of business), a change of registration is required (Article 16, Paragraph 1 of the APFS).
Existing intermediaries (eg, insurance agents and brokers) and financial service intermediaries cannot have both qualifications in the same field. This is because customers may be confused as to which position and under what regulations the intermediary operates. Therefore, if the financial service intermediary later qualifies as an existing intermediary, it loses the qualification to work in the relevant business field as a financial service intermediary.
The regulations imposed on financial service intermediaries consist of:
- common regulations that apply regardless of business type; and
- regulations that apply according to business type.
Common regulations that apply regardless of business type
Common regulations that apply regardless of business type under the APFS include the following:
- restrictions on the use of business names (Article 19);
- display of signs (Article 20);
- prohibition of name lending (Article 21);
- security deposits (Articles 22-23);
- obligation of good faith (Article 24);
- provision of information (Article 25);
- measures concerning business operations (Article 26);
- prohibition of accepting deposits (Article 27); and
- obligation to enter into a contract with a designated dispute resolution agency (Article 28).
Regulations that apply to insurance intermediary services
The following regulations stipulated in the Insurance Business Act apply mutatis mutandis to insurance intermediary services:
- commercial law (provisions for brokerage business) mutatis mutandis (Article 293);
- obligation to provide information (Article 294, Paragraphs 1 and 2);
- obligation to know and confirm customers' needs (Article 294-2);
- prohibition of self-contracting (Article 295);
- prohibited acts (Article 300, Paragraph 1); and
- cooling-off rights (Article 309, Paragraphs 7, 8 and 10).
Practical suggestions for insurers, insurance agents and brokers
The following are practical suggestions from the financial service intermediary legislation for insurers, insurance agents and brokers.
Practical impact on insurers
Insurers (including foreign and small-amount short-term insurers) are expected to have a financial service intermediary to mediate insurance contracts with customers.
Since financial service intermediaries do not belong to any specific financial institutions (ie, insurers), the insurer is not obligated to supervise the financial service intermediary, and it will not be automatically liable for any damages to the customer caused by the financial service intermediary. In that sense, financial service intermediaries are more similar to insurance brokers, who are independent of insurers, than insurance agents, who are under the guidance and supervision of insurers.
In addition, the obligation to provide information regarding financial service intermediaries (Article 25 of the APFS) includes the obligation to disclose the fees of insurance intermediaries. Specifically, Article 25, Paragraph 2 states that:
A financial service intermediary, when requested by a customer, receives the fees, remuneration, and other consideration received by the financial service intermediary for the financial service intermediary business.
While this provision helps to make any incentives transparent, the fees required to be disclosed include those paid by the insurer to the financial service intermediary. Insurers should carefully take this rule into consideration when they outsource the mediation of insurance contracts to financial service intermediaries.
Practical suggestions for insurance agents and brokers
Insurance agents and brokers cannot register as financial service intermediaries for insurance intermediary businesses.
Rather, financial service intermediaries can be registered for businesses other than insurance intermediary business (eg, deposit intermediary business, securities brokerage business or money lending intermediary business). Qualifications were required in the past since permission as a bank agent and registration as a financial instruments intermediary were required in order to carry out these operations. However, in the future, it will be necessary to register as a financial service intermediary only to carry out such operations.
As a result, insurance agents and brokers can provide a wide variety of financial services, including products other than insurance, as one-stop shops by registering as financial service intermediaries.
