Recent developments in fintech-related banking regulations in Japan

Traditional banks have been the key players of the finance industry in Japan. In recent years, however, fintech companies, on the back of venture capitalists and lighter licensing burdens, have been increasingly active in certain aspects of finance in Japan. This has resulted in pressure on traditional banks to provide fintech services, whether by themselves or through affiliated companies. These efforts, however, have been impeded by regulations under the Banking Act of Japan, which restrict the scope of businesses that banks and bank subsidiaries are permitted to conduct.

Under the Banking Act, banks are only allowed to engage in core banking activities (ie, deposit-taking, money lending and funds remittance) and certain ancillary businesses, as well as in securities-related businesses specified in the Banking Act. Furthermore, the scope of permitted activities by bank subsidiaries and domestic companies more than 5% of whose voting rights are held by banks and bank subsidiaries are strictly limited.

As a result, Japan-licensed banks have found it difficult to engage in the full range of fintech businesses. This has prompted amendments to the Banking Act of Japan in recent years by the Financial Services Agency of Japan (the FSA), for purposes of relaxing the scope of permitted activities by banks. For example, the Banking Act was amended in 2016 to enable banks, with the FSA’s approval, to hold more than 5% of voting rights in business entities, including fintech companies, if (i) the business of the relevant fintech companies will enhance the business sophistication of the banks or (ii) the business of the relevant entities will enhance the convenience of the banks’ customers (Investment Approval). Since then, Japanese banking groups have been using Investment Approvals for investments in fintech companies, such as those offering electronic Know Your Customer (e-KYC) technology and fraud detection technologies.

Considering the greying population and the Covid-19 situation in Japan, banks are expected to contribute to the rehabilitation of the economy and to spearhead sustainable growth. Accordingly, on 22 December 2020, the Working Group on the Banking System (the Working Group) of the FSA Financial System Council published a report summarising the results of the Working Group’s review of system improvement measures. The improvement measures were aimed at, among others, relaxing the scope of businesses that banks and their subsidiaries may engage in, based on current socio-economic developments. This was followed by the submission of a bill to amend the Banking Act in accordance with the Report to the Diet on 5 March 2021.

Under the Report and Bill, banks will be permitted use their banking-related management resources in ways that will contribute to sustainable social development, such as investment in projects related to digitalisation and regional revitalisation. The proposed amendments to the Banking Act are expected to enable banks to engage in certain businesses, including the fintech business by using the resources of such businesses, which banks in Japan have so far been unable to engage in. Furthermore, the qualification criteria and, in some cases, the requirement for Investment Approval, will be eased for certain types of business under the Report and Bill. For example, in the case of certain banking groups, the filing of a notification with the FSA would suffice in place of an Investment Approval, if the investment and the relevant banking group satisfy certain conditions.

The Bill is expected to be promulgated in 2021. The draft cabinet office ordinances under the Bill, which will provide more details on the amended regulations, will be made available for public consultation purposes in 2021, and will be finalised after the elapse of the public consultation period.

Following promulgation of the Bill, banks and banking groups are expected to enhance their engagement in fintech businesses as well as increase their investments in Fintech companies.