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Japan regulation shakeup a game changer for banks

[TOKYO] Japan's financial supervisor is laying the groundwork for a regulatory overhaul that could lead to a shakeup in the nation's US$10 trillion banking industry.

The Financial Services Agency is examining how to change the legal framework so that all providers of financial services are subject to the same rules - a move that would allow emerging companies such as technology startups to compete directly with traditional financial institutions. For banks, the revamp could end their monopoly on deposit-taking and lending as well as free them up to enter new businesses.

Emerging technologies have blurred the boundaries between providers of financial services and made it harder to maintain separate regulations for different types of companies in the industry, according to Financial Services Minister Taro Aso. Shifting from rules that are focused on entities - banks, insurers and other institutions - to one based on functions would make the industry more competitive and adaptable, he told reporters last week.

"We can strengthen the competitiveness of finance in Japan so that companies are free to select from diverse business models," Mr Aso said. "This will encourage imagination, creativity and ingenuity from financial institutions and new entrants."

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Financial institutions worldwide are being disrupted by companies that provide services ranging from digital payments to remittances using smartphones. The Bank for International Settlements said in a report this month that regulators may need to reassess their supervisory approach to adapt to changing business models brought on by technology. Japan trailed all but one of 20 markets on fintech adoption last year, according to a report by consulting firm EY.

"The financial industry is being forced to rethink what it is with the emergence of fintech," said Ryoji Yoshizawa, an analyst at S&P Global Ratings in Tokyo. "Finance should be behind the scenes of the real economy, and the time for the industry to change in line with real business has arrived." Japanese banks are trying to diversify into areas such as asset management as near record-low interest rates and tepid loan demand undermine their traditional lending model. There is scope for technology to play an increasing role as the nation's households look for ways to invest more of their US$17 trillion of financial assets.

The most promising fintech companies would benefit from being allowed to compete on the same playing field as established financial institutions, according to analyst Tsuneharu Miyake.

"This will be a historic turning point not seen since the beginning of banking regulation in Japan," said Mr Miyake, head of financial research at Mizuho Research Institute in Tokyo. Emerging firms "that are capable of disciplining themselves to abide by the laws will have the best chance." Like overseas, Japan has seen a plethora of fintech startups pop up in recent years, ranging from robot investing adviser WealthNavi Inc to personal finance manager Moneytree KK. Foreign companies such as Chinese mobile payments giant Ant Financial Services Co and UK remittance venture TransferWise Ltd have also entered the nation.

The FSA is considering new rules around four key functions: settlements, credit, investing and risk transfer. It's seeking to ensure customers are amply protected while allowing the flexibility for a range of enterprises to develop new financial services.

A panel consisting mainly of academics began meeting late last year to discuss the overhaul, which Mr Aso said will take "a considerable amount of time." The group concluded submissions of expert opinions on the four functions at its most recent meeting on Feb 9, public records of the gathering show.

One issue that's emerged as a key area of debate is how to handle deposits. Under the current law, banks are licensed to take deposits that are guaranteed if they fail. Some panel members have warned that if deposit business is opened up to competition from non-banks, this could lead to a breakdown of credit creation, according to the documents.

The FSA has already made moves to free up what banks are allowed to do under the current law. In 2016, it amended legislation to allow lenders to take larger stakes in fintech firms. Last year, the regulator introduced a registration system for cryptocurrency exchanges.

An index of Japanese bank shares has fallen 4 per cent this year, more than the benchmark Topix's 1.5 per cent decline. Shares of the three so-called megabanks - Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc - closed higher in Tokyo trading on Tuesday.

Banks, whose assets totaled 1,089 trillion yen (S$13.4 trillion) as of March 2017, are cautious about the changes. The deliberations so far strike a balance between encouraging innovation and ensuring security, Japanese Bankers Association Chairman Nobuyuki Hirano told reporters in January. Still, he added, the rules "have the potential to have a large impact on banks' business models and strategy."