Japan regulators may inspect foreign banks in structured bond crackdown

JAPAN’S financial watchdog plans to examine how global investment banks sell controversial structured bonds in the country, according to people with knowledge of the matter, a sign that a crackdown on the products is gathering pace. 

The Financial Services Agency (FSA) will check whether the main issuers of such products disclose enough information to local financial firms, which buy and then distribute them to retail investors across the country, the sources said, declining to be named as the discussions are private. Japan’s FSA will also look into the fees charged, the sources added.

There is a possibility that the Securities and Exchange Surveillance Commission will also conduct inspections on foreign securities firms if that is deemed necessary, said an official from the FSA’s enforcement arm, in response to queries from Bloomberg. An official at the FSA declined to comment. 

Regulators in Japan have stepped up scrutiny of how structured bonds are marketed after receiving numerous complaints from buyers who suffered unexpected losses. Already, the heightened oversight has pushed several of the nation’s biggest lenders, including the banking unit of Sumitomo Mitsui Financial Group as well as Mizuho Financial Group, to curb or suspend sales of the structured products. Regulators have said the products are too complicated for most people to fully understand, and pricing is not transparent.

Structured bonds include products linked to the performance of various underlying assets or indexes, potentially exposing holders to large losses in times of market stress. 

In annual policy guidelines released last month, the FSA said it will monitor whether financial institutions have a system in place to create, sell and manage products in a way that will contribute to clients’ wealth creation, taking particular aim at the complexity and volatility of structured bonds. BLOOMBERG