Better Regulation -Improving the quality of financial regulation-

“Better Regulation” refers to improving the quality of financial regulation in order to bring about a better regulatory environment. The Financial Services Agency (FSA) sees Better Regulation as an overarching theme for the institution’s work in the coming years.

(Why is Better Regulation now called for?)

(1) Making Japan's financial and capital markets more competitive internationally

Given that we are entering an era of shrinking and aging population, in order that the Japanese economy may be able to achieve sustainable development, the financial services industry should play a core role in the economy by generating high value added. The quality of regulation is a crucial determinant of the competitiveness of financial markets to which it is applied. Therefore, strengthening Japanese markets’ competitiveness by improving the quality of financial regulation contributes to widening the function of financial institutions, which act as mother markets in Japanese markets, and enhancing the convenience of the customers.

(2) Changes in the situation of the Japanese financial sector

The environment in which we pursue the objectives of financial regulation, - ensuring stability of the financial system, protecting the interest of the users of financial services, and ensuring fairness and transparency in financial markets - has changed considerably. Now that substantial progress has been made in terms of disposing non-performing loans, uncertainties about financial system have been dispelled. Meanwhile, as a result of efforts by both public and private sectors in response to the exposed problems of protecting the users of financial services and ensuring fairness and transparency in the markets, significant progress has been made in improving the regulatory framework and the actual practices. In the current phase where the lessons learnt from these experiences should be firmly incorporated and further deepened, it is crucial for each financial institution to tackle various issues based on its own efforts and responsibility. Financial regulation also should correspond properly to the changes in situation and should place a greater emphasis on self-responsibility and voluntary efforts by financial institutions.

(Four Pillars of Better Regulation)

The first pillar: “The optimal combination of rules-based and principles-based supervisory approaches”

“The rules-based approach” involves establishing detailed rules and applying them to individual cases. On the other hand, “the principles-based approach” is a framework where several key principles are explicitly stated so as to encourage voluntary efforts by financial institutions in line with such principles. It is important to ensure the effectiveness of the entire financial regulation through an optimal combination of these two approaches. We are open to discussion with relevant parties as to find out how to combine these two approaches.

The second pillar: “Prompt and effective responses to high-priority issues” (risk-focused, forward-looking approach)

This approach requires the recognition of the areas where potential risks exist in the financial system as quickly as possible, and the effective allocation of our resources to these areas so as to address such significant issues. In order to do this, it is necessary to monitor economics and markets and to understand as accurately as possible the strategies and activities of financial institutions, in addition to conducting intensive communications with financial institutions and market participants.

The third pillar: “Encouraging voluntary efforts by financial institutions, and placing greater emphasis on incentives for them”

Our approach toward more incentive-compatibility and greater emphasis on voluntary efforts has already been incorporated to a significant extent in our regulatory framework, such as the Financial Inspection Rating System, Basel II and the Relationship Banking framework for regional banks. Voluntary efforts of financial institutions are becoming more crucial as the financial sector is shifting into a new phase, so we intend to pay continuous attention to the effectiveness of such frameworks.

The fourth pillar: “Improving the transparency and predictability of regulatory actions”

The FSA has compiled and published its inspection manuals and supervisory guidelines, which clarify checkpoints in inspection and supervision. The inspection and supervisory policies are also published for each operational year. In addition, we have published criteria for our administrative actions, upgraded our No Action Letter System, and posted Q & As about the interpretation of rules. Thus we have taken various measures to improve the transparency and predictability of our actions. We intend to continue our efforts and examine, whether there is any room for further improvement by listening to the opinions of interested parties.

(Five Areas of Focus for Better Regulation)

(1) Enhancing dialogue with financial institutions

Enhancing dialogue with financial institutions would not only help financial institutions to obtain greater predictability about administrative actions, but also help us in promptly identifying what is happening and what is forthcoming in financial markets and sectors. Dialogue is also important in cooperating with public and private sectors in seeking solutions to the problems for the financial system as a whole.

(2) Enhancing dissemination of information

We would like to bring about an environment where people and interested parties throughout the world can easily access basic information and data on FSA’s regulation and our views on current issues. To this end, we intend, for instance, to promote translation of financial-related laws into English and to participate actively in symposiums and other public events both at home and abroad.

(3) Strengthening cooperation with foreign authorities

To respond to acceleration in globalization of financial transactions, it is important to pay attention to international harmonization of regulations and supervision, and to grasp global market situations. Thus, we would like to strengthen cooperation with our counterparts abroad and international organizations.

(4) Enhancing research functions to promptly grasp market developments

The FSA is in a position to analyze and assess the impacts of macroeconomic and market events on the business of financial institutions and the stability of the entire financial system. And these analyses and assessments should be reflected on appropriate actions on the supervisory front. For these purposes, it is our intention to enhance our research functions. In addition, we will strengthen our communication and cooperation with relevant parties, including major market participants, the Bank of Japan, and our counterparts abroad.

(5) Redoubling efforts for human resource development

As the financial sector is a field which requires high degree of professionalism, it is imperative that we improve the quality of our staff without lagging behind in terms of financial technology and financial market development in order to upgrade our efforts toward better regulation. Ideas to be considered in this regard would include improving our training programs, developing incentive-inspiring approaches in our personnel system, and personnel exchanges with the private sector.