Details lost in Japanese investment law rush

Poor consultation mars Japan''s introduction of a badly needed, modern code for investment advisors.

Japan's government is preparing legislation to take to the Diet this year that should streamline the country's's myriad of outdated investment management regulations. Industry representatives welcome the initiatives, but are concerned that the government's lack of consultation means the final version may be botched or contain surprises.

The Financial System Council, which advises the prime minister, first mooted the Investment Services Law in 2004. The law's basic outline was agreed last year: to take Japan's patchwork of laws covering the sale of financial products and create a new, streamlined framework.

The Investment Services Law is an important step toward the government's goal of adopting a regulatory system similar to the United Kingdom's Financial Services Markets Act, in which all financial products are sold under a single, flexible legal structure - one designed to better protect consumers and allow market forces to work more efficiently.

Industry participants welcome the new direction, but the lack of consultation and the hurried nature of getting the legislation to the Diet - expected as early as this month - mean no one outside the drafters in the Financial Supervisory Agency have a clear idea of what it will be like.

"Our concern is that there won't be time left once the FSA makes this law," says Shoji Suzuki, general manager of the international affairs department at the Japan Securities Investment Advisers Association, the lobby group for investment advisors. "No one knows the details and so there will very limited time to understand it all. We don't understand why it's being rushed."

But the Investment Securities Law should prove a boon to most fund management companies. Japan now requires separate licenses for investment advisors (who manage separate managed accounts for institutions) and investment trust managers (who manage mutual funds, known in Japan as investment trusts). Although many asset management firms have both licenses, they face costs of duplications, red tape and complications to their brands.

Moreover, the two license types do not have equal powers. For instance, investment advisors cannot sell derivatives-based products or lend out securities, but investment trust managers can. Investment advisors also face high minimum capital requirements, which the new law may reduce or scrap. The existing quilt of laws can be contradictory and leave many loopholes or grey areas, such as allowing fund managers to outsource administration. And currently entire sectors, such as interest-rate and foreign-exchange swaps and certain quasi-municipal bonds, have no rules for investor protection.

The new law is meant to fix all these problems, and will have a big impact on fund managers and securities companies distributing investment products. It should have little impact on insurance companies or banks, beyond their marketing and selling investment products.