Main Topics Presented by the Financial Services Agency (FSA) at a
Dialogue with the Industry Association
Held by the Japan Securities Dealers Association (JSDA) on June 20,2023
1. G7 Finance Ministers and Central Bank Governors’ Meeting and G7 Summit in May○ The G7 Finance Ministers and Central Bank Governors’ Meeting was held in Niigata
from May 11 to 13. After the meeting, the communiqué was published. Among issues
highlighted in the communiqué, we would like to introduce some issues relating to
the financial sector– including the recent developments in the financial sector,
sustainability reporting, and transition finance.
○ First, on the recent developments in the financial sector, the communiqué presents
three key points:(1) The G7 Finance Ministers and Central Bank Governors (FMCBGs) reaffirmed thatthe financial system is resilient, supported by the financial regulatory reforms
implemented after the 2008 global financial crisis.
(2) They also agreed that they would continue to work closely to monitor financial
sector developments and stand ready to take appropriate actions to maintainfinancial stability and the resilience of the financial system.
(3) The Financial Stability Board (FSB) and standard-setting bodies (SSBs) will takestock of lessons learned from the recent episodes and consider the consequentpriorities for its future work to enhance the financial system. They also agree tocontinuetoprioritize

addressing

vulnerabilities

innon-bank

financialintermediation (NBFI) and strongly support the work of the FSB and SSBs on
enhancing the resilience of NBFI.
○ On sustainability reporting, the G7 FMCBGs looked forward to finalization of the
ISSB’s standards for general reporting on sustainability and for climate-related
disclosures as well as the ISSB’s future work on disclosure on biodiversity and human1capital.
○ On sustainable finance, the G7 FMCBGs recognized that transition finance has asignificant role in advancing the decarbonization of the economy as a whole. In termsof financed emissions (those of greenhouse gases related to investment and lending),
they encouraged the public and private sectors to enhance availability and credibilityof information, which would help promote transition finance by enabling assessmentof the progress on transition in a forward-looking manner and accounting for the
trajectory of financed emissions.
○ The G7 Summit was held in Hiroshima from May 19 to 21 as well. The Leaders’Communiqué also refers to the recent development in the financial sector,
sustainability reporting, and transition finance.
○ Following the G7 meetings, many international conferences are scheduled for thesecond half of 2023. We will continue to communicate with financial institutions andcontribute to global discussions.

2. Results of the IOSCO Annual Meeting○ The International Organization of Securities Commissions (IOSCO) held its annual
meeting in Bangkok, Thailand, from June 13 to 15. I would like to share outlines of
its results.
○ The IOSCO Board reported and discussed sustainable finance, NBFI, and other issues.
・ In terms of sustainable finance, they exchanged opinions with the Chair of the ISSB.
They also discussed whether the IOSCO should endorse the sustainability disclosure
standards proposed by the ISSB, and decided to announce how they would respondpromptly after their finalization.
・ In terms of NBFI, they discussed revisions proposed in the IOSCO guidance tostrengthen liquidity risk management of open-end funds (OEFs), and decided to start
public consultation in or after July. A new topic, future examinations of private
finance, came up for discussion.

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○ The Asia Pacific Regional Conference (APRC) also held a meeting, sharing
information on developments of sustainable finance and crypto-asset regulations in
the region.
○ These councils have roles to play in the examination and coordination of actions
especially for addressing challenges in international regulations. As a vice-chair andchair of the Board and APRC, respectively, we will work to get our state of affairs
and principles reflected in international discussions. We are grateful for theremarkable contributions of the JSDA to activities of the IOSCO. We are looking
forward to continuing the close cooperation between us.

3. Cybersecurity Self-Assessment○ As a new initiative for strengthening cybersecurity, the FSA, together with the Bankof Japan (BoJ) and the Center for Financial Industry Information Systems (FISC),
developed a "Check Sheet for Cybersecurity Self-Assessment". Around late June,financial institutions will be asked through the JSDA to perform self-assessment
according to the Check Sheet.
○ Using the Check Sheet, the executives of financial institutions are encouraged to
examine the state of cybersecurity of their organizations, including management
frameworks, staffing and financial resources as well as training and human resource
development, and to take initiatives to improve their cybersecurity. Results of theself-assessment will be summarized to give feedback to the respondents.

4. Results from the monitoring of customer-oriented business conduct of dealers of riskinvolving financial products○ I have three topics to introduce on the development of mechanisms for practicing
customer-oriented business conduct and ways to secure their effectiveness.
(1) Many financial institutions leave challenges to be solved in their systems for thesale and administration of risk-involving financial products. For instance, their risk3

return analysis of the products, as well as identification of expected customer
groups based on the analysis, is less than satisfactory. There also remain concerns
over whether proposals they advance to customers are truly relevant to their needs.
They are expected to consider again what will bring the greatest benefit to theircustomers and what they should do for that end.
(2) It turns out that most of the policies prepared by banks for their initiatives forcustomer-oriented business conduct follow the wording of the Principles for
Customer-Oriented Business Conduct. They leave unclear what specific initiatives
they will carry out to pursue "the best interests of customers" that they seek torealize. In most of them, there is some divergence observed between their policies
and the realities of what their sales people do on the ground for the initiatives. Whatis critical to secure customer-oriented business conduct is to align, based on theirpolicies, the concept of customer-orientation and the recognition of specificinitiatives for that end throughout the organization and reform their culture in amanner helpful to getting the concept firmly established. Through the process, they
are expected to pay attention to what impact a performance evaluation may have.
(3) In terms of three-line management, many financial institutions remain focused oncompliance when inspecting/auditing sales of risk-involving financial products andcomplaints about them. What is critical for them is to develop a PDCA mechanism
to perform inspections beyond the viewpoint of compliance, including management
and culture audits, and carry out improvements.
○ The FSA will release the results of the monitoring on its website at the end of June.
In reference to the results, the management is expected to take the leadership in
securing and promoting customer-oriented business conduct, which should help the
Doubling Asset-based Income Plan come to fruition.

5. Self-regulatory Rules for Structured Bonds○ Self-regulation guidelines for complex structured bonds will come into force in July
2023. I know that some days ago, the JSDA issued to its members a notice on

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disclosure of structuring costs and analysis and disclosure of risks and returns.
○ We understand that financial institutions are considering, with full understanding ofwhat the new rules aim at and stipulate, whether they will continue to sell complex
structured bonds under the new rules, or if so, what sales and solicitation regime theyshould prepare, including for rigorous narrowing-down of target customers. Anyway,
the FSA recognizes that they will refrain from continuing to offer complex structured
bonds to a broad range of customer groups as ever. The sector is expected to take theenforcement of the new rules as an opportunity to eliminate sales of complex
structured bonds to customers who lack a full understanding of what characteristics
or risks they have.
○ As part of our monitoring, the FSA will follow up to see whether they will comply
with the Guidelines when selling complex structured bonds. The JSDA is also
expected to perform rigorous examination at its audit and other opportunities.

6. Solicitation for Sale of Risk-involving Financial Products○ Among the risk-involving financial products, the ordinary corporate bond and shareare standardized, general products, while other instruments, called hybrid bonds, haveintermediate characteristics between them. Hybrid bonds are indeed classified into
several types, but we understand that in general, investors are required to have moresophisticated expertise to deal with them than with ordinary bonds or shares because
information, such as their risks and returns, critical when making investment
decisions, is more difficult to evaluate.
○ We request that security companies targeting ordinary investors in solicitation for, andsale of, these types of products act with special care in light of laws and regulations
and policies they have announced for their initiatives for customer-oriented businessconduct. Specific examples are as follows:・ whether, before offering individual hybrid securities, they, as a dealer, have fully
examined their features as a product and risks, among others;5

・ whether they have any mechanism in place to keep their solicitation relevant toattributes of their customers (knowledge, experience, wealth, and purpose oftransactions) by, for instance, narrowing down target customers for solicitation,
taking fully into account features and risks of individual products; and・ whether they see to it that their people, especially those working on the ground,fully understand they must avoid lacking objectivity when giving explanations
about individual products to their customers by laying emphasis solely on theirbenefits or giving insufficient explanations about their risks.
Security companies should examine again the points above, regardless of marketing
channels concerned.

7. Consolidation of Identity Verification Tools into "My Number Card (MN Card)"○ The Priority Policy Program for Realizing a Digital Society, decided upon by the
Cabinet on June 9, sets out policies of the government, stating that tools to verify
identity under the Act on Prevention of Transfer of Criminal Proceeds and the Act on
Prevention of Fraudulent Use of Mobile Phones should be consolidated into theJapanese Public Key Infrastructure (JPKI), using My Number Card (MN Card), thatthe way of sending the image of a driver's license or using an ID verification
document with no photo of the holder's face on it or similar methods should be
discontinued, and that the JPKI should also be adopted for face-to-face identity
verification, instead of photocopying any ID verification document.
○ Given the significant impact the change of ID verification methods would give on thebusiness practice of the financial sector, we would like to ask them for feedback on
the disuse of eKYC solutions for non-face-to-face transactions (NFFTs) and theconsolidation into the JPKI as well as examine the state of their business practicewhile working with the Digital Agency, the National Police Agency, and otherministries and agencies concerned to consider what improvements and revisions
should be made.
○ We will have an opportunity to ask the JSDA to give feedback on the state of use of6the JPKI and current methods of ID verification. We would be grateful for their active
participation in dialogues.

8. Guiding principles for securing stable provision of essential infrastructures services
under the Economic Security Promotion Act○ On April 28, a Cabinet Decision was made on the guiding principles for securing
stable provision of essential infrastructure services under the Economic Security
Promotion Act. The framework under the Act requires operators of essential
infrastructure, when planning to introduce critical facilities, to have them inspectedby the relevant authorities before their installment.
○ That day, each ministry and agency, including the FSA, set up a Consultation Deskfor receiving pre-filing consultations of infrastructure operators on the introductionof specified important facilities and other matters, and keeping constantcommunication with them as well as other operators concerned. Financial institutions
are encouraged to make effective use of the Desk of the FSA to properly manage risks
concerning economic security.

9. Bold Policy and Action Plan for a New Form of Capitalism○ On June 16, the Cabinet decided on the Basic Policy on Economic and Fiscal
Management and Reform (Bold Policy) 2023 and the 2023 Grand Design and Action
Plan for a New Form of Capitalism, among others, which include many policy
programs the FSA should pursue.
○ First, to facilitate the Doubling Asset-based Income Plan, prepared in November
2022, the FSA will do the following:・ make preparations for the inauguration of the new NISA system;・ establish a mechanism for promoting the provision of neutral and reliable advice
for consumers;7

・ enhance economic and financial education; and・ stimulate the financial and capital market by, for instance, reforming corporate
governance.

○ When the Council on Economic and Fiscal Policy met on April 26, the Prime Ministergave an instruction that "radical reforms be carried out in the asset management
industry of Japan together with other sectors concerned" to develop asset
management as a pillar of the national economy. Based on the instruction, the Bold
Policy and the Action Plan state that a specific policy plan should be prepared forundertaking radical reforms in the asset management industry by, among others,
improving governance in asset management companies and owners and enhancing
the mechanisms for that, or turning stewardship activities more substantial;
enhancing support and fostering competition for encouraging new asset managementcompanies to enter into the market, both from Japan and overseas; and developing
environments helpful to improve asset management competency and diversify
investments. They also state that information of the plan and reforms should be
actively disseminated both in Japan and overseas.
In this respect, some news media have suggested that we were ready to present
something determined. In fact, the FSA has left the matter fully open. We intend tocommunicate with business operators and other parties concerned both in Japan andoverseas when developing the plan. We understand that some financial institutions
work closely with asset management companies in their own group to provide
services. What could be done to improve such services? Or beyond that, if you offer
us any suggestion helpful to make the Japanese financial market more attractive, wewill be grateful to accept that as what we should refer to.
○ The Bold Policy and the Action Plan for a New Form of Capitalism also include
several policy programs for enhancing the status of Japan as an international financial
center, such as the following, other than those for radically reforming the asset
management industry, mentioned before, those for making corporate governance8reforms more substantial, those for encouraging green transformation (GX)
investment and lending, and those for examining what action to take in the taxation
system for making Japan an international financial hub.
Especially, policy programs for developing an Asian GX hub were mentioned by the
Minister of Finance at a Japan-ASEAN Ministerial Meeting. Some of the programs,
specifically those for human resource development, data preparation, andestablishment of a consortium for project development, among others, must be carriedout with the participation of the JSDA. We would like to ask for your cooperation.
○ The Bold Policy and the Action Plan include a broad range of programs together withthose mentioned above. To carry them out, we would also ask for your continued
close cooperation.

10. Progress Report on Enhancing Asset Management Business○ As for what we should take into account when considering the policy plans mentioned
above, the Progress Report on Enhancing Asset Management Business 2023 has been
published. The Report summarizes what we are aware of as challenges to address inthe current state of the services provided by asset management companies in Japan.
We would be grateful if you would read through the Report. Here, I would like topick up on five topics on the current state of their services.
(1) Fund wrap: While the range of products offered in the mass market is growing,
investors, when looking at some of them, may find it difficult to understand whether
they are a combination of investment trust funds or a service of providing advice
on wealth building on a continuous basis. The design of a fund wrap itself is formed
in a manner such that dealers and asset management companies will have incentives
to manage conflicts of interest and deliver the the greatest benefits to customers. At
the same time, what added value the dealers will bring with their services is difficult
to understand in some respects.
(2) Selection of products for investment trust funds: Some thematic fund products,

9reaching a peak in net asset under management 6 to 18 months after being put on
the market, and marking rapid declines in AUM, have selected and sold even inrecent years.
(3) Advanced redemption of investment trust funds: The number of investment trust
funds offered by asset management companies in Japan should desirably be
optimized as it is considerably larger than overseas.
(4) Electronic delivery of a prospectus: Asset management companies hoping to adopt
the HTML format for delivering their prospectuses electronically should not be
demotivated in their effort to offer more convenience for customers. We expect the
JSDA to work in cooperation with the Investment Trusts Association and consider
how initiatives for electronic delivery should be carried out with emphasis placedon efficiency.
(5) Services of administration and management organizations for corporate-typedefined contribution pension plans: It appears that many financial institutions
provide services for corporations as an administration and management
organization. At some of them, a large percentage of the subscribers turn out to havechosen a principal-protected product.
○ Here, I have presented the way the FSA recognizes the current state of things and what
we are aware of as challenges to address. There will be some who have different
recognition and opinions from ours. At any rate, what is important first is to raise thelevel of the management sector of Japan and its human resources to world class. We
believe it critical to share the target with financial institutions. Afterwards, we would
be grateful if we could have an opportunity to talk with financial institutions on what
specific action would be effective for improvement.

11. Enhancement of the asset management business:○ In terms of the Progress Report on Enhancing Asset Management Business 2023, we,as supervisory agency, must make some requests to you in two issues: securing10independence of asset management companies and strengthening product governanceon an industry-wide basis.
<Securing the independence of asset management companies>○ First, asset management companies belonging to a group of financial institutions
might place precedence on benefits of dealers in the group over those of theircustomers, a danger that often causes a conflict of interests between the group as awhole and the customers. It is one of the issues the Progress Report deals with.
○ We understand that some financial institutions work in close cooperation with asset
management companies in their group to provide services. In preparing a policy planfor making radical reforms in the asset management industry of Japan, what should
we do to make the Japanese financial market more attractive? It is an issue we would
like to consider in communication with you. We would like to ask for yourunderstanding and cooperation.

<Strengthening product governance on an industry-wide basis>○ Second, a growing number of major asset management companies start to undertakesome initiatives from the standpoint of putting the benefits of customers first by,among others, extracting funds with a poor performance record and deciding
principles of action in reducing trust fees for them or redeeming them before maturity.
No such initiative could be carried out without the understanding and cooperation ofdealers because, in such cases, it is they who may have to respond to the customers
concerned.
○ It is also important to offer products with specific characteristics to investors suitable
to them. When selling any product, dealers are expected to take into account attributesof customers the asset management company assumed when they structured them. It
is an example of initiatives for strengthening product governance on an industry-widebasis. We would appreciate their cooperation.

1112. Initiatives for Sustainable Finance○ The Working Group on Financial Institutions’ Efforts towards the Decarbonization of
the Economy and the Working Group on Impact Investment, set up in October 2022
under the Expert Panel on Sustainable Finance, have discussed policy programs forpromoting effective dialogue between financial companies and businesses forrealizing decarbonization and enhancing economic growth and sustainability throughinvestments for solving social and environmental challenges.
○ Their discussions form the basis of a report they are each expected to publish in June.
○ The Decarbonization Working Group has prepared a set of suggestions to financial
institutions as a "Guide" for expanding their engagement, which covers (1) use of arange of indicators about transition, (2) development of emissions data, and (3)understating of the suitability of pathways. Preparation of a transition plan bybusinesses forms one of the crucial themes for carbon neutrality. We would bedelighted if the report is helpful to you as a reference in your work.
○ Many major financial institutions have joined the Glasgow Financial Alliance for Net
Zero (GFANZ), a coalition of international financial institutions aiming for
decarbonization, working to set targets for transition and prepare a transition plan.
○ The Alliance launched a branch in Japan on June 9. It is the first country branch for
the GFANZ. We hope to work with them for a broad range of activities for
decarbonization, includinginternational

public relations, humanresource

development, and awareness-raising in Japan.
○ In its report, the Impact Investment Working Group has summarized significance of
the impact investment and basic ideas of the concept for supporting start-ups andother parties that should play central roles to realize innovations necessary to solve
social challenges and achieve commercial viability at the same time.
○ The Working Group will prepare basic guidelines on requirements for such investment,
before finalizing them through public consultation. Under the guidelines, investors
would be required, for instance, to define in advance the effect and profitability they12

intend to achieve through their investment and, after investing, monitor and manage
the effect achieved.
○ As an initiative to further promote investment, the Report also suggests that a rangeof parties concerned, such as businesses, investors and financial institutions,academics, and local governments, set up a consortium for collecting and sharing
data, measuring methods, and case studies.
○ In line with the Report, a consortium will be formed this year at the earliest. So, we
would be grateful for your active participation and dialogue with businesses towards
facilitating a virtuous cycle of funds between problem-solving and commercial
viability.

13. Preparations for the Invoice System○ There are not more than three months left before the start of the qualified invoicesystem for consumption tax on October 1, 2023.
(Note) The invoice system is a new method introduced for deducting consumption tax included in
the purchasing cost. Using a qualified invoice, the seller informs the buyer of the correct tax
rate applicable and the amount of consumption tax the latter must pay. Specifically, a qualified
invoice, in the form of paper document or data, carries on it a registration number, a tax rateapplicable and an amount of consumption tax in addition to what the current separate
accounting invoice has on it. A business operator is allowed to issue qualified invoices after it
files an application for registration to a relevant Tax Office.

○ We would like to express our gratitude for the JSDA's cooperation for achieving asmooth transition to the invoice system. The Association has issued letters to member
companies to recommend those who had yet to file an application for registration todo, and ask the members to inform their agents working on a commission basis of the
new system, among others, so that they will make appropriate preparations.
○ We understand the invoice system may have some consequences on transactions with
tax-exempt business entities. Members of the Association are expected to take13

considerable care in responding to their commissioned agents who have been
exempted from paying consumption tax.
○ We also ask the JSDA for continued cooperation especially for getting the new systemfully recognized by all the parties concerned in the sector. When a member comes to
the Association with any difficulty, worry or concern, we would be glad to hold aconsultation.

14. Obtainment of a My Number Card by More People and Promotion of Its Use○ We would like to express our gratitude again for the various cooperation financial
institutions have offered for encouraging people to obtain an MN Card and promoting
its use.
○ According to the findings of a survey conducted by the Digital Agency in March(released so far), 83.3% of those in the financial instruments business and similarindustries held an MN Card.
○ We will continue working hard to raise the percentage of MN Card holders. We would
also be grateful if you could again offer cooperation for promoting the use of MN
Cards.
○ As an initiative to persuade more people to obtain an MN Card, the Government isencouraging the use of JPKI services. We would appreciate it if financial institutions
could engage themselves actively in their use.
○ As part of its effort to encourage the private sector to use the MN Card morecommonly, the Government is also working to inform them of the following so thatthese services will be fully recognized and used more widely:(1) cases where MN Cards are used effectively;(2) that private-sector businesses can have electronic certificate issued at no fee

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provisionally for three years from January this year; and(3) that a download service started in May for a smartphone app equal in functionality
to the MN Card, which can be used as an electronic certificate for a signature anduser ID verification.
We would be grateful for the cooperation of financial institutions.

15. Progress in Transition Away from LIBOR○ The publication of LIBOR, except for the USD LIBOR, was ceased at the endDecember 2021. With regard to USD LIBOR, the publication will be ceased at endJune 2023. We have seen no major obstacles to the transition away from USD LIBOR
so far through our monitoring. Given the publication cessation is just around thecorner, financial institutions with legacy contracts are required to take necessary
actions thoroughly.
○ The synthetic USD LIBOR, calculated using market data will be released from July
2023. Financial institutions will be required to take appropriate actions, including
explanations for their customers, if they make use of the synthetic USD LIBOR.
○ The FSA will continue to monitor the progress in transition arrangements, cooperatingwith the BOJ, with regard to remaining contracts referencing the USD LIBOR evenafter July and contracts referencing synthetic USD LIBOR, and require them to takenecessary actions depending on their respective situations.

16. Actions Financial Institutions Are Asked to Take after the Disasters Caused in 2023
by Heavy Rainfall along the Baiu (Seasonal) Rain Front and Typhoon No. 2 (Mawar)○ We would like to express our heartfelt sympathy to all victims of the disasters causedby heavy rainfalls that continued from June 2.
○ With the application of the Disaster Relief Act to Ibaragi, Saitama, Shizuoka and15

Wakayama Prefectures after the heavy rainfall, the Local Finance Bureaus
responsible for the regions, jointly with the BoJ, issued a Request for Financial
Actions to financial institutions concerned and other relevant parties○ We ask again financial institutions doing business in the affected areas to take into
consideration our requests and fully recognize the voices and needs of those sufferingfrom the disasters for providing detailed support tailored from their viewpoint.

(End)

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