Banking activity in Japan is strictly regulated and supervised. The main body tasked with the responsibility of regulating financial institutions in Japan is the Financial Services Agency (FSA). In Japan, banks must be incorporated in accordance with the requirements set out in the Companies Act, and must also be issued a banking license in keeping with the provisions of the Banking Act and Japanese Banking Law.
Financial Services Authority
The Banking Act provides the Commissioner of the FSA with the power to inspect accounts, reports and other information in relation to banks, related companies and their agencies. It provides the Commissioner with the power to enter the premises of banks to conduct physical inspections. The Banking Act also allows the FSA to impose penalties on parties for misconduct, and the FSA has the power to force a bank to cease operations or invalidate its banking license altogether.
Bank of Japan
While the Bank of Japan has not been imbued with regulatory and punitive powers to the extent that the FSA has, it does play a significant role as a watchdog in the banking industry. The Bank of Japan is authorized to conduct inspections for the purposes of ensuring the health and stability of the monetary system where there exists an agreement between the Bank of Japan and banks or other financial institutions, such agreements existing mainly because of accounts the latter maintain with the Bank of Japan.
Prevention of anti-competitive practices
The Antimonopoly Act is the main piece of legislation that has been enacted to combat anti-competitive practices. The act forbids banks and other financial institutions from obtaining shares in another Japanese company greater than 5%. There are, however, exceptions to the rule, and the Fair Trade Commission may permit banks or other financial institutions to acquire more than 5% of another company’s shares if in their view such acquisition will not be anti-competitive. Banks are also allowed to acquire shares greater than 5% of other financial establishments.
Prevention of money laundering
The Prevention of Transfer of Criminal Proceeds and the Foreign Exchange and Foreign Trade Act requires all banks and other financial institutions to perform a high degree of due diligence in relation to their clients. Banks are required to ascertain a prospective client’s identity and perform background checks before allowing the opening of new accounts. Significant transactions and transfers are also subject to due diligence. The onus to report any suspicious activities falls on the banks.
People who have bank accounts in Japan are protected under the Depositor Protection Law and the Deposit Insurance Act. The former entitles banking customers to, in certain circumstances, look to the bank for compensation in cases of credit or debit card fraud, for instance in situations where a credit or debit card is stolen or faked.
The Deposit Insurance Act attempts to safeguard the deposits of customers in the event that a bank collapses. Ordinary deposits, for instance those in current accounts, are entitled to protection, while other types of deposits are insured on a limited basis.