January 26, 2009
Financial Services Agency

FSA publishes the second progress report on its efforts toward "Better Regulation"

1. Optimal combination of rules-based and principles-based supervisory approaches. The principles-based supervision encourages voluntary efforts by financial firms in line with explicitly stated principles. This and the rules-based supervision, under which rules are prescribed in detail and applied to individual cases, are expected to complement each other. To this end, the FSA agreed with the relevant parties on the fourteen "Principles in the Financial Industry" in April 2008, which will constitute the cornerstones of principles-based supervision.
2. Timely recognition of priority issues and effective response. In rapidly changing financial markets, it is important to take a proactive approach in which we promptly identify areas where potential risks exist, and allocate our resources effectively to these areas so as to address such significant issues. In the period covered by the progress report, for example, the FSA strived to examine risk management practices by financial institutions, including whether they conduct robust stress testing with due consideration of cases with lower market liquidity.
3. Encouraging voluntary efforts by financial institutions and placing greater emphasis on providing them with incentives. Incentive-compatible approaches have already been incorporated to a significant extent in the FSA’s regulatory framework. They were further enhanced by the reform of the firewall regulations (to be implemented in June 2009) and the associated introduction of a framework under which financial institutions are required to establish systems for managing conflicts of interest suited to their own circumstances.
4. Improving the transparency and predictability of regulatory actions. Pursuing fair and transparent financial regulation and supervision has been one of our core principles of the FSA's conduct. In this connection, the FSA made clear priority issues in its inspection and supervision in the current program year (July 2008 to June 2009) in its annual inspection and supervision policies.

1. Enhancing dialogue with financial institutions and other relevant parties, for example by increasing opportunities for exchange of views with the financial industry, including foreign business organizations.
2. Enhancing dissemination of information, through active use of lectures, speeches, interviews, and contribution of articles. Dissemination of information in English has also been enhanced, including on the FSA website.
3. Strengthening cooperation with foreign authorities, including by contribution to international debate on the subprime mortgage problem at international fora, and by strengthened multilateral and bilateral framework for cooperation.
4. Enhancing research functions for prompt recognition of market developments, exemplified by the establishment of the Office for Supervisory Policy, Financial Market and Risk Analysis in July 2008 in order to promote further advancement of risk analysis.
5. Redoubling efforts for human resource development, including through provision of intensive staff training as well as recruitment of experts and personnel exchanges with the private sector.