Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

The FSA is the main regulatory body of fintech products and services that are regulated under the various financial regulations. The METI is also the regulatory body for certain payment services (eg, credit cards or other advanced payment services).

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

The arrangement of investment deals for an investment fund that invests mainly in securities or derivative transactions, constitutes a ‘financial instruments business’ under the Financial Instruments and Exchange Act (FIEA), and registration under the FIEA is required.

To arrange transactions for investments comprising mainly securities or derivatives, registration under the FIEA is also required.

Dealing in investments as principal or agent, under which investments are made mainly in securities or derivative transactions, may also constitute a ‘financial instruments business’ under the FIEA (in certain circumstances), and thus registration under the FIEA may also be required.

Giving advice on investments in relation to the value of securities or investment decisions on financial instruments under a contract for a fee may constitute an ‘investment advisory business’ under the FIEA, and registration is required.

Lending of money is regarded as a ‘moneylending business’, which generally requires registration as a moneylender under the Money Lending Business Act.

There is no specific licensing requirement for factoring transactions and invoice discounting. However, if a factoring transaction or invoice discounting is made with recourse, such transaction may be deemed as moneylending, and thus engaging in such transaction may require registration as a moneylender under the Money Lending Business Act.

Secondary market loan trading does not trigger a licensing requirement.

Acceptance of deposits is generally prohibited without a banking licence, under the Japanese Banking Act.

There is no licensing requirement for foreign exchange transactions. However, certain currency derivative transactions are regarded as ‘financial instruments business’ under the FIEA and registration is required thereunder.

A bank licensed under the Banking Act may conduct funds transfer services (which will generally include payment services). Other than banks, registration under the Payment Services Act as a funds transfer service provider is required before conducting payment services. If the payment service is provided as a later payment option using a credit card, then registration under the Instalment Sales Act is required for the issuers.

Consumer lending

Is consumer lending regulated in your jurisdiction?

A lender conducting consumer lending activities (excluding the acceptance of deposits or instalment savings, which requires a banking licence under the Banking Act) must register as a moneylender under the Money Lending Business Act. The moneylender is also required to appoint a manager for each business office of the moneylending business that is registered under the Money Lending Business Act.

The total permissible lending amount is generally limited to one-third of the borrower’s annual income. The cap of the interest falls between 15 and 20 per cent per annum depending on the principal amount of the loan pursuant to the Interest Rate Restriction Act.

Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

There is no specific licensing requirement for trading loans. If a moneylender transfers loan claims, the transferee will be subject to the same restrictions under the Money Lending Business Act that are applicable to the original moneylender and the transferor must notify the operating transferee of such applicability of the restrictions.

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

Under the FIEA, the solicitation of subscription of shares in collective investment schemes or investment management of assets of collective investment schemes, in principle, are regarded as financial instruments business. Therefore, business operators who conduct such activities must be registered as financial instruments business operators.

If a crowdfunding company raises funds for investment in a company through a form of silent partnership (tokumei kumiai - TK) , or if a social lending company raises funds for lending money to a company seeking funds through this form of partnership, the solicitation to invest in such partnership would, in principle, be considered as falling within the scope of a financial instruments business activity, and would thus need to be registered under the FIEA.

Alternative investment funds

Are managers of alternative investment funds regulated?

In Japan, there are no regulations that particularly focus on alternative investment fund managers. Under the FIEA, investment managers acting for alternative investment funds such as hedge funds, private equity funds and real estate funds are regulated in the same manner as those acting for UCITS-like investment funds, which means they are not subject to the augmented regulations under the FIEA. It should be noted, however, that additional licences may be required under other laws (apart from the FIEA) for such alternative investment fund managers who conduct the business of managing investors’ funds by investing in real estate (not beneficiary rights therein).

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

In Japan, individuals intending to engage in the business of lending money, or to act as an intermediary for the lending or borrowing of money, must be registered under the Money Lending Business Act. As such, peer-to-peer lending is structured so as to avoid the individual financier being required to be registered as a moneylender under the Act.

Marketplace lending in Japan generally takes the form of a TK partnership, under which a social-lending business provider collects funds from TK partnership investors. The social-lending business provider advances the funds to enterprises or individuals as loans. The operator then receives principal and interest payments from the enterprises or individuals and distributes the funds as dividends and returns to investors. In this structure, the operator is required to be registered both as a moneylender under the Money Lending Business Act (in order to provide the loans), and as a financial services provider under the FIEA, in order to solicit the purchase of interests in TK partnerships to investors.

Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

In Japan, crowdfunding is categorised as donation-based crowdfunding, reward-based crowdfunding and investment-based crowdfunding. Investment-based crowdfunding is further categorised as equity-based crowdfunding, fund-based crowdfunding and social-lending. See question 9 for regulations specific to social lending.

Reward-based crowdfunding is the most commonly used category of crowdfunding in Japan. It involves sales and purchase agreement of the reward. It is not regulated under the FIEA. However, certain regulations under the Specified Commercial Transactions Act apply, which, in particular, regulate descriptions in advertisements.

Equity-based crowdfunding and fund-based crowdfunding are regulated under the FIEA, which defines certain internet-based solicitations such as ‘electronic solicitation handling services’. Certain special provisions apply to electronic solicitation handling services from those that apply to ordinary solicitation handling services for securities. In order to encourage new market entrants for equity-based crowdfunding and fund-based crowdfunding, requirements for the registration as a financial instruments business operator were relaxed by the amendment to the FIEA in 2014 for business operators conducting such business within a certain limited scope.

Invoice trading

Describe any specific regulation of invoice trading in your jurisdiction.

There is no specific regulation that applies to invoice trading in Japan. However, there are some legal and regulatory issues that must be noted. If there is an agreement between a supplier (ie, the seller of the invoice) and a buyer (ie, the payer under the invoice) to prohibit the transfer of invoices, there is a risk that the investor will not be able to acquire invoices pursuant to the Civil Code. Further, the debt transfer must be perfected by the buyer being notified of or approving the transfer, pursuant to the Civil Code, or it must be registered in the debt transfer registration system.

If invoice trading is with recourse to a supplier (ie, the seller of the invoice) when no repayment is forthcoming from the buyer, such transactions may be characterised as secured lending and the business would be required to obtain a moneylending business licence under the Money Lending Business Act.

Payment services

Are payment services regulated in your jurisdiction?

Payment services fall within the scope of funds remittance transactions, which generally require a banking licence under the Banking Act. The Payment Services Act permits non-banking entities registered thereunder to engage in funds remittance transactions in the course of their business, provided that the amount of each exchange transaction is not greater than ¥1 million.

Funds remittance transaction is not defined in the Banking Act or any other acts, but according to a precedent set by a Supreme Court decision, ‘conducting a funds remittance transaction’ means accepting a request from a customer to transfer funds using the mechanism of transferring funds between parties at a distance without actually transporting cash, or accepting or actually carrying out the request.

If payment services fall into the above definition, the business operator could be required to obtain a banking licence or register under the Payment Services Act.

Open banking

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

On 1 June 2018, the amendment to the Banking Act came into force regulating Electronic Payment Intermediate Service Providers to facilitate open API. Electronic Payment Intermediate Service Providers are defined to include intermediaries between financial institutions and customers, such as entities using IT to communicate payment instructions to banks based on entrustment from customers, or entities using IT to provide customers with information of their financial accounts held by banks. Entities providing financial account aggregation services are also categorised as Electronic Payment Intermediate Service Providers. They are required to register with the FSA.

Insurance products

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Yes. In Japan, when a company (including a fintech company) conducts insurance solicitation (ie, acts as an agency or intermediary for insurance contracts), it must be registered as an insurance agent or insurance broker under the Insurance Business Act.

Credit references

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

In general, while credit references of individuals are subject to the Act on Protection of Personal Information, credit references of corporations are subject to confidentiality obligations under financial services regulations (such as Corporate Information under the Money Lending Business Act) and confidentiality agreements between financial institutions and corporations.

In Japan, personal credit information agencies collect information on the ability of persons to make credit repayments and provide such information to financial institutions that are members of such agencies. Financial institutions (banks or moneylenders) may not use information on the ability of individuals to meet repayments (personal credit information), for purposes other than the investigation of the ability of fund users to make repayments.