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[return to Contents] |
Inspection Manual for Trust and Banking
Companies (Supplement to the Financial Inspection Manual for
Trust Services Business) |
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On July 13, 2006, the Financial Services Agency (FSA) produced a
manual to be used by inspectors upon inspecting the trust
operations of financial institutions engaged in trust business
(trust banks, city banks and regional banks running trust
operations, etc.) entitled ''Trust Inspection Manual (the
Supplement to the Financial Inspection Manual: for Trust
Operations)'' and issued it in the form of an official notice
from the Director-General of the Inspection Bureau.
This article provides an overview of the Trust Inspection
Manual.
1. Overview of Trust Inspection Manual
(1) Purpose of Producing Trust Inspection Manual
The FSA has steadily developed the inspection framework by
producing financial inspection manuals, etc., since 1999. As
part of such efforts, the FSA has recently produced an
inspection manual for trust operations of financial institutions
engaged in trust business.
The role of trust operations of financial institutions engaged
in trust business is becoming increasingly important,
considering the advances in financial technologies and market
trends, as exemplified by the increasing number of cases in
which trusts are utilized as a vehicle of asset liquidation and
securitization in recent years. The FSA believes it was the
right time to produce the Trust Inspection Manual at this point.
(2) Background to Publication of Trust Inspection Manual
In April 2006, a study group including experts and professionals
in the private sector was established within the Inspection
Bureau of the FSA. The study group began looking into preparing
the Trust Inspection Manual from a specialized and technical
viewpoint, and held discussions from various angles.
A draft of the Trust Inspection Manual was put together based on
its studies, and opinions were sought broadly from the general
public. The draft was examined based on the opinions and
comments received, and the final draft of the Trust Inspection
Manual was compiled and issued in the form of an official notice
from the Director-General of the Inspection Bureau.
The Trust Inspection Manual will be applied to inspections
conducted in Program Year 2006 (July 2006) and thereafter.
(3) Application of Trust Inspection Manual
Banking operations and trust operations will be clearly
distinguished from each other in inspections targeted at
financial institutions engaged in trust business: inspections
will based on the Trust Inspection Manual in relation to trust
operations and problems unique to financial institutions engaged
in trust business, and on Financial Inspection Manuals in
relation to banking operations.
Moreover, as trust products handled by financial institutions
engaged in trust business vary widely and are diverse in
features, the Trust Inspection Manual explicitly states that
when applying the Manual, inspectors should give due
consideration to the features of trust products, in addition to
the size and characteristics of the financial institution, so
that it would not be implemented in a mechanical/monotonous
manner.
2. Focus of Each Checklist
(1) Trust Operations Management Systems Checklist
The Trust Operations Management Systems Checklist consists of
four check items relating to internal control systems for
properly managing trust operations in general: I.
Management in General; II. Compliance with Laws and Regulations;
III. Risk Management; and IV. Internal Audit.
Check items in I. Management in General include: (1)
whether or not management policies for trust operations have
been clearly defined; (2) whether or not management policies for
trust operations address the fulfillment of the duty of care of
a good manager, duty of loyalty, duty of segregated custody,
etc.; and (3) whether or not management policies for trust
operations address the development of a system to prevent
conflict of interest.
Check items in II. Compliance with Laws and Regulations, III.
Risk Management and IV. Internal Audit include whether or
not staff with sufficient knowledge and experience of trust
business are assigned.
(2) Management Systems for Trust Acceptance Checklist
When concluding a trust agreement, a financial institution
engaged in trust business needs to accept trust with a proper
explanation of the terms and conditions of the agreement, etc.
Accordingly, this checklist is designed to examine the
development status of the management system for trust
acceptance and the fulfillment status of its functions, and
consists of such check items as: (1) whether or not the
financial institution identifies the attributes of the trustor
(knowledge, objectives, experience, asset position, etc.) and
confirms that there are no problems in the individual
solicitation activities in view of suitability; (2) whether or
not the financial institution is fulfilling its duty to provide
an explanation as a trustee such as providing an explanation of
risks to trustors as obliged by laws and regulations and
information on matters required for making an investment
decision; and (3) whether or not the financial institution is
performing any acts prohibited by laws and regulations in
relation to the trust acceptance under a trust agreement, such
as making false statements and making assertions in view of
trustor protection.
(3) Screening Systems for Trust Acceptance Checklist
It is important that a financial institution engaged in trust
business ensures a system to only accept trusts that enable the
execution of operations concerning trust business under laws and
regulations and trust agreements by properly screening the
trustor's objectives, trust assets, etc., before concluding a
trust agreement, in view of: (1) whether or not the duty of care
of a good manager and other such duties as a trustee can be
fulfilled; (2) whether or not the responsibilities as a legal
owner can be fulfilled; and (3) whether or not it would result
in taking part in illegal acts, etc., by the trustor.
Accordingly, it is necessary to conduct appropriate screening
for trust acceptance by developing a system to properly screen
new products, new schemes, etc., in advance and conduct
screening for acceptance.
For this purpose, this checklist is designed to examine the
development status of the screening system for trust acceptance
and the fulfillment status of its functions, and consists of
such check items as: (1) whether or not the terms and conditions
or the scheme of the trust agreement are aimed at evasion of
laws or prohibited by laws and regulations such as money
laundering; (2) whether or not the financial institution
confirms and examines in detail the terms and conditions of the
trust agreement are not based on the trustor's inappropriate
objectives (such as concealment of losses, avoidance of
disclosure and tax avoidance); (3) whether or not the financial
institution confirms and examines off-balance-sheet liquidation
transactions are acceptable as off-balance sheet items in
accounting terms; (4) whether or not the financial institution
confirms and examines the appropriateness of the entrusted
amount (amount of trust) so that it does not contribute to the
trustor's fraudulent accounting procedures or undermine the
beneficiary's interests as a result of overvaluation of trust
assets by overestimating the proceeds from trust assets when
accepting trust in a liquidation scheme; and (5) whether or not
there is a system to confirm the existence of any violations of
building-related laws and regulations in cases where the trust
asset is real estate, and if there are violations, examine
whether it is possible to fulfill the owner's responsibility as
a trustee by such means as identifying the actual situation,
etc., and restoring it to a legal state within a reasonable
restoration period.
(4) Trust Asset Management Systems Checklist
Financial institutions engaged in trust business are required to
manage trust assets by exercising care of a good manager,
including the segregated custody of trust assets and the
protection of trustors' rights without fail.
For this purpose, this checklist is designed to examine the
development status of the trust asset management system and the
fulfillment status of its functions, and consists of such check
items as: (1) whether or not the financial institution engaged
in trust business has a system for segregated custody of trust
assets to clearly distinguish between the accepted trust assets
and its own assets and other trust assets and properly determine
the respective beneficiaries of the trust assets; (2) whether or
not the financial institution properly performs cross-checks
with covenants and delivery settlement in cases where trust
assets are invested in securities according to the orders of the
person who has the right to give investment orders such as the
trustor; (3) whether or not the financial institution promptly
collects accurate information on allotment to shareholders,
mergers, demergers and other corporation actions, etc., that
give rise to changes in the value of shares and corporate bonds,
and properly protects the rights so that the trust assets would
not incur losses; (4) whether or not the financial institution
observes the clauses of the trust agreement regarding the
management of trust assets in the form of real estate such as
land and buildings, and if a real estate with such problems as
environmental risks are accepted, whether or not it takes such
measures as monitoring aimed at identifying changes in the
situation regarding the problems and solving the problems in
light of owner responsibility and trustee responsibility.
(5) Trust Asset Investment Management Systems Checklist
A financial institution engaged in trust business needs to
invest trust assets in consideration of the duty of care, duty
of loyalty, etc.
Accordingly, this checklist is designed to examine the
development status of the trust asset investment management
system and the fulfillment status of its functions, and consists
of such check items as: (1) whether or not there is a system to
observe the trust agreement and operational guidelines, etc.,
which provide for asset allocation, diversified investment,
etc., in order to fulfill the duty of care; (2) whether or not
the financial institution has developed a system to execute
trading under the best terms for the customer based on the
disclosed indicative price and trade terms in cases where trust
assets are invested in securities; (3) whether or not there is a
system to explain the trust asset investment policies, etc., and
report the investment results to the trustor appropriately; and
(4) whether or not there is a system to prevent transactions
which give rise to conflict of interest in view of the duty of
loyalty to the beneficiary.
In particular, (4) is the most important item in trust asset
investment management. Financial institutions engaged in trust
business operate in a business environment where various
activities are prone to give rise to conflict of interest as
they invest both their own assets and trust assets. Therefore,
it is necessary for the financial institutions to prevent
activities that give rise to conflict of interest so that they
do not pursue their own interests or interests of a third party,
etc., at the expense of the interests of trust accounts.
Furthermore, check items aimed at ensuring the soundness of bank
accounts are established in the risk management system item of
V. Trustees' Assets (bank accounts). As financial institutions
engaged in trust business handle deposits, etc., it is important
to execute business operations in such a manner that protects
both beneficiaries and depositors when running trust operations.
(6) Checklist for Side-business Risk Management Systems
Financial institutions engaged in trust business can engage in
side businesses referred to in each item of paragraph 1, Article
1 of the Law Concerning Trust Operations of Financial
Institutions, etc. It is necessary to engage in operations with
full awareness of the characteristics of the operational risks
and system risks arising from such side businesses, as well as
the laws and regulations, etc., that must be observed in
relation to side businesses.
Accordingly, this checklist is designed to examine the
development status of the side-business risk management system
and the fulfillment status of its functions, and the consists of
check items regarding whether or not a system has been developed
to ensure the appropriateness of will executor services,
transfer agent services, real-estate-related services and
pension plan management services among side-businesses which can
be operated by financial institutions engaged in trust business.
3. Conclusion
The Trust Inspection Manual is regarded fundamentally as a
handbook to be used by inspectors when inspecting the trust
operations of financial institutions engaged in trust business.
Financial institutions engaged in trust business are expected to
make full use of their creativity and ingenuity in consideration
of this Manual, etc., based on the principle of
self-responsibility, voluntarily prepare internal regulations
and supplementary operational rules according to their size,
characteristics and nature of their respective operations,
ensure soundness and adequacy of their operations and strive to
protect trustors and beneficiaries.
Moreover, it is hoped that sharing the check items in the Trust
Inspection Manual with financial institutions engaged in trust
business will lead to more efficient and effective inspections
through the two-way dialogues between financial institutions and
inspectors during inspections, and help improve the transparency
of financial administration. |
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[return to Contents] |
Revision of Inspection Manual for
Insurance Companies |
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1. |
Introduction
Recently, the Financial Services Agency (FSA) has
radically revised the ''Inspection Manual for Insurance
Companies'' prepared in June 2000 (hereinafter referred
to as ''Insurance Inspection Manual'') in order to turn it
into an inspection handbook that is more in tune with
the actual state of insurance companies. Upon revising
the Insurance Inspection Manual, the FSA publicly
released the draft and invited the general public to
submit opinions, and after making necessary corrections,
issued and published it in the form of an official
notice from the Director-General of the Inspection
Bureau on June 30, 2006. (For the sake of convenience,
the Insurance Inspection Manual prior to the revision
will be referred to as ''the old Manual'' and the revised
version as ''the revised Manual''.)
This article provides a brief explanation of the revised
Manual. |
2. |
Overview of Revised Manual
In the revised Manual, ''internal control system'' and
''compliance system'' are regarded as focuses common to
all insurance companies. In consideration of the
operations of insurance companies, items to be checked
during inspection are sorted by dividing the items into
''insurance solicitation'', ''customer protection, etc.'',
''financial soundness and actuarial calculations'',
''product development'', ''insurance underwriting risks'',
''asset management risks'' and ''operational risks, etc.''
While the revised Manual is written on an
operation-by-operation basis unlike the old Manual,
various risks subject to verification under the old
Manual continue to be treated as check items.
The revision is thoroughgoing, taking into account the
formulation of the ''Comprehensive Guideline for
Supervision of Insurance Companies'', the amendment of
laws and regulations relating to insurance business and
changes in the socioeconomic climate.
The revised Manual will be applied to inspections
conducted from inspection year 2006 onwards (July 2006
and thereafter). All insurance companies are within the
scope of application, including overseas branches of
insurance companies, Japanese branches of foreign
insurance companies and specific corporations. |
3. |
Content of Each Checklist
(1) Checklist for Internal Control System
As management discipline needs to function effectively
and internal control needs to be exercised properly at
insurance companies, the FSA prepared a checklist for
the internal control system of insurance companies.
''Internal control system'' addresses the role of the
board of directors, etc., risk management, internal
audit, external audit, and the role of actuaries. For
example, the role of directors and the board of
directors is to confirm that: (1) corporate ethical
standards have been established and a system to secure
such standards in concrete terms has been developed; (2)
management policies and management plans have been
formulated and are made common knowledge; (3)
information required for governance is obtained/shared,
examined, analyzed and discussed; (4) basic policies
have been formulated to establish a framework required
for ensuring operational adequacy, etc.; (5) decisions
are made regarding the execution of operations, and the
execution of operations is supervised; (6) the duty of
care of a good manager and the duty of loyalty are
fulfilled; (7) divisions in charge of compliance, risk
management and internal audits are properly assessed;
and (8) an information disclosure framework has been
established.
(2) Checklist for Compliance System
This a checklist for confirming the extent to which the
compliance system is developed and established in
consideration of the importance of insurance companies'
compliance with laws and regulations, etc. in all
aspects of their operations, based on the view that it
is necessary to develop and establish a compliance
system on a company-wide scale. ''Compliance system'' is
regarded as a focus common to all insurance companies,
as is ''internal control system''.
This checklist consists of such items as the extent to
which the compliance system is developed/established,
response to scandals, scope of business, identification,
report of suspicious transactions, etc.
(3) Checklist for Insurance Solicitation Management
System
The FSA prepared a checklist for insurance
solicitation management systems, due to the need to
develop and establish appropriate insurance solicitation
management systems for the purpose of protecting
customers upon the solicitation and conclusion of
insurance contracts.
Adequacy of insurance solicitation will be verified on
the basis of check items that are distinguished between
life insurance policies and non-life insurance policies,
as well as newly-established items that are common to
life and non-life insurance policies in light of the
increase in ''third-sector'' products and the spread of
cross-selling.
(4) Checklist for Management System for Customer
Protection, etc.
Insurance contracts need to be managed in an appropriate
and speedy manner in view of protecting customers'
interests, etc. Moreover, a system to make appropriate
judgments and promptly perform clerical processes must
be developed to perform work associated with the payment
of claims, which is one of the most fundamental and
important functions that form the foundation of the
operations of insurance companies. In addition, an
appropriate management system must be developed and
established to deal with customer complaints, etc. and
handle customer information. For this reason, the FSA
prepared a checklist for management systems for customer
protection, etc.
''Management system for customer protection, etc.'' is a
new item group created as part of the latest revision,
and consists of such items as an insurance contract
management system, claims payment management system,
complaints handling system and customer information
management system.
Among the above, the checklist addresses the development
of a claims payment management system for the purpose of
fulfilling the payment of claims in an appropriate
manner, in order to protect policyholders, etc. For
example, there are check items regarding the extent to
which the claims payment management system is
developed/established, including the establishment of a
claims payment management division, as well as check
items relating to the role of the claims payment
management division.
(5) Checklist for Financial Soundness and Actuarial
Calculations Management System
As the management of financial soundness and actuarial
calculations is indispensable for insurance companies to
fulfill their responsibilities without fail and to
protect policyholders, etc., the FSA prepared a
checklist for confirming such a management system.
The checklist addresses the appropriateness of liability
reserves, etc. set aside and the adequacy of the
solvency margin ratio. Furthermore, the FSA has created
a new check item related to the execution of management
analysis, considering the importance of conducting
stress tests and management analyses such as future cash
flow analysis, due to the need for insurance companies
to identify the impact of accrual of future liabilities
on their financial soundness and to take additional
managerial or financial action as necessary.
(6) Checklist for Product Development Management
System
Upon product development, insurance companies are
required to develop a management system that looks into
risk, financial, solicitation, legal and all other
aspects based on the principle of self responsibility,
in consideration of laws and regulations such as the
Insurance Business Law. For insurance products, a more
flexible approach is being taken in fields where there
are limited problems in terms of protection of
policyholders, etc., as exemplified by the gradual shift
towards a notification system. Accordingly, it is
becoming increasingly important to enhance insurance
companies' product development management systems. With
this in mind, the FSA has created a specific checklist
for insurance product development management systems and
product-release follow ups.
(7) Checklist for Insurance Underwriting Risk
Management System
As insurance underwriting has a substantial impact on
the management of insurance companies in the long run,
the FSA has created a checklist for insurance
underwriting risk management systems.
Insurance products are peculiar in that the premium is
determined when an insurance contract is concluded and
security is assured thereafter based on future income
and expenditure projections. They are exposed to the
risk of the economic climate, incidence of insured
events, etc. changing in ways not predicted at the time
the premium was decided. The FSA has created this item
group in consideration of the importance of managing
such risks that are unique to insurance companies.
(8) Checklist for Asset Management Risk Management
System
As it is important to engage in asset management in
consideration of the whereabouts of risks associated
with asset management, the characteristics of
liabilities, etc., the FSA has created a checklist for
asset management risk management systems.
Market risk management systems, credit risk management
systems and real estate risk management systems are
brought together under asset management risk management
systems. The Credit Risk Assessment Manual is treated as
an accompanying document for reference, in consideration
of the operations of insurance companies and to ensure
user-friendliness for inspectors.
(9) Checklist for Management System for Operational
Risks, etc.
The FSA has created a checklist for the management
system of operational risks, etc., in consideration of
the importance of managing operational risks,
information system risks, etc. that exist in all
operations.
In addition to check items relating to operational risk
management systems, information system risk management
systems and liquidity risk management systems, the FSA
has created a new check item for crisis management
systems, and created an item group named management
systems for operational risks, etc. as a whole.
(10) Accompanying Reference Materials
The revised Manual treats the On-Site Business Operation
Checklist and Credit Risk Assessment Manual as
accompanying reference materials, in order to make it
user-friendly for inspectors. The On-Site Business
Operation Checklist shows examples to be utilized by
inspectors when conducting a site investigation at
business establishments, etc. of insurance companies,
life insurance agents and non-life insurance agencies. |
4. |
Conclusion
The Insurance Inspection Manual is regarded purely
as a handbook to be used by inspectors when inspecting
insurance companies. Each insurance company is expected
to voluntarily prepare a more detailed manual according
to its size and characteristics, ensure soundness and
appropriateness of the insurance company's operations
and protect customers by fully demonstrating its
creativity and ingenuity in accordance with the
Insurance Inspection Manual, etc. based on the principle
of self-responsibility.
The FSA believes that the development of the Insurance
Inspection Manual will contribute to further
improvements in its functions to inspect insurance
companies. Sharing the check items in the Insurance
Inspection Manual with insurance companies should lead
to more efficient and effective inspections based on
enhanced dialog between insurance companies and
inspectors during inspections, and should also help
improve the transparency of financial administration.
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