Examining the Japanese market, the author of this article looks at how to answer clients when they ask why fund marketing regulations are so complex, vague and often overly restrictive?
The author of this article is Cathy Brand, CEO Sales Road
Maps Online Ltd® – someone who has written in these pages before
about compliance and strategy in the financial world. The usual
editorial disclaimers apply to views of guest contributors. Jump
into the conversation! Email [email protected]
Cathy Brand
The Government-Sponsored Enterprise (GSC) has been tracking the
evolutionary development of country fund marketing regulations in
60-plus jurisdictions for more than two decades.
When we advise clients on marketing their funds in numerous
jurisdictions, clients frequently ask: “Why”? “Why are
fund marketing regulations in a specific jurisdiction so
strict/overly complex and/or so vague/grey?”
Clients ask the “Why Question” to understand why it can be easy
for them to comply with fund marketing regulations in some
countries but so difficult in others.
Is the past prologue?
To understand a country’s current fund marketing regulatory
regime, it’s always helpful to understand that country’s historic
regulatory regime.
Everyone is familiar with the quote from “The Tempest” by William
Shakespeare: “What is past is prologue.” This phrase refers
to the influence that history has on understanding and
contributing to context shaping current events.
When you understand the economic history and cultural influences
on the evolutionary development of a country’s fund marketing
regulations, you have the context to understand that country’s
regulations today.
One of the countries we have analysed with the most interesting
regulatory development is Japan.
In this blog, we explore how Japan’s regulations for marketing
funds in various structures have evolved over the past two
decades, to create contextual understanding of the country’s
current regulatory regime.
Importantly, we explore “the power of investor pushback” in the
Japan Case Study: how Japan’s powerful pension fund feedback (and
pushback) to Japan’s Financial Services Authority has impacted
the country’s current fund marketing regime.
Have country fund marketing regulations evolved over
time?
Yes. Country fund marketing regulations are different
from each other and each country’s fund regulations have
evolved at their own individual pace, based on their respective
economic and cultural factors.
There is some quasi-standardisation of country fund marketing
regulations at EU/EEA level, but each country’s regulations – as
implemented locally – are not the same due to “top-up” (gold
plating) regulations when implementing EU directives locally.
How have Japan’s fund marketing regulations evolved over
time?
Japan’s financial products and services regulations have
undergone dramatic evolutionary development in the last 2+
decades. In the late 90s, foreign financial services industry
commentary was:
“Japan’s fund marketing and licensing rules are so unclear.
How can we comply with Japan’s fund marketing and licensing
regulations when we can’t understand them?”
When Japanese-English translation issues surfaced, the challenge
for foreign (Western) fund managers to understand Japan’s rules
increased.
Japan’s economic boom and foreign firm
response
In the late 90s, confidence in Japan was high: the Japanese
government launched its “Big Bang” economic reforms. As a result,
there was an increased trend towards non-Japanese (Western)
financial institutions who wanted to do business with investors
in Japan, a quite lucrative opportunity.
By the early 2000s, Japan’s economic recovery had created new
millionaires, wealthy Baby Boomers preparing to retire, and
foreign firms rushed into Japan (again) to try to crack this
difficult but lucrative market. Foreign fund managers, brokers
and banks targeted Japanese investors to take advantage of the
environment created by the Big Bang, a key economic trigger to
Japan’s business development. Japan was, in effect, “open for
business.”
Japan’s economic boom and Japan FSA response
Japan’s economy was booming … but Japan’s regulations (especially
its fund private placement and licensing regimes) were still
under development compared with Western regulatory regimes.
Japan FSA realised it had to act.
The increased business activity by foreign fund managers wanting
to conduct business in Japan and with Japan investors rose to a
threshold level of capturing Japan FSA’s attention.
During that time, our GSC Japan Counsel confirmed that Japan FSA
proactively undertook a hiring spree for bilingual
Japanese-English lawyers from leading, world-renowned US/UK law
schools. It recruited these lawyers under lucrative employment
contracts to relocate to Japan and work for Japan FSA.
Similarly, Japan FSA started cracking down on breaches of its
financial services regulations by foreign institutions. Several
foreign financial institutions were found to be in breach of
Japan’s securities and licensing regulatory regime and were
expelled from the country.
For example, the expulsion of Citigroup Private Bank from Japan
in 2004 (and earlier 1999 sanctions against other Citi affiliates
resulting in Citigroup affiliate franchise losses) was the most
dramatic of a string of failures among foreign firms that have
too often misread the attitudes of Japanese investors and
regulators.
Powerful investor segment: Japan’s pension
funds
According to a 2018 survey by a leading global consultant of
foreign investment by pension funds around the world, Japanese
retirement assets at that time totalled ¥182 trillion ($1.2
trillion), making Japan’s pension industry one of the largest
pension fund markets in the world.
Japan’s pension funds face several challenges, including
servicing the world’s oldest population, low interest rates and
sustainability issues. Its pension funds need to diversify its
investments in alpha generating opportunities, as the timeline
for Japan Pension Funds’ Projected Benefits Obligation (PBO), or
the total amount that a pension fund expects to pay to meet its
future pension obligations benefits to retirees, is increasingly
shorter and shorter.
Japan’s government cannot afford to not protect its valued
pension funds.
