TOKYO -- With negative interest rates leaving Japanese financial institutions hungry for fees, the Financial Services Agency will draw up guidelines aiming to ensure that the companies act in consumers' best interests rather than try to generate commissions.
The seven-point draft to be released Friday will cover all activities that financial institutions engage in, such as selling investment products and lending. Fee transparency will be a key point. The FSA will urge companies to fully disclose and explain all product fees and charges.
Financial institutions already voluntarily offer this information for investment trusts and savings-type insurance policies. The new guidelines will cover a wider range of products, such as structured notes -- a type of debt whose return is linked to the performance of a particular underlying asset or index.
Commissions are paid not only by investors to the brokerages or banks they buy products from, but also by third parties in some cases, such as an insurer paying a bank that sells its products at branches. The guidelines will seek disclosure of such commissions, which could affect consumers' purchasing decisions.
For product bundles, companies will be asked to state whether the products can be purchased individually and to let consumers compare the bundle with buying its components individually. Bundles often contain products that customers do not need.
Managing conflicts of interest will be another major theme. The asset management companies that put together investment trusts and other products often belong to big financial groups. A consumer choosing from between similar products would prefer one with lower fees, but the seller might rake in a bigger profit from an affiliate's product.
The new guidelines will ask financial institutions to draw up specific policies for managing such conflicts of interest and make them publicly available. Companies will also be encouraged to provide an easy-to-understand explanation if a customer asks why a certain product is being recommended.
The FSA plans to release the guidelines as a report within the year and urge financial institutions to comply as soon as early 2017.
Issuing guidelines, as opposed to hard-and-fast rules, is intended to ensure that companies do not simply follow them to the letter while ignoring their spirit. By intentionally not spelling everything out, the FSA hopes to spur financial institutions to voluntary compete to better serve customers rather than responding the same way across the board. Institutions that do not follow the guidelines will be asked for explanations.
The agency sees self-serving product recommendations by financial institutions as a reason why individuals have shied away from putting money into investments rather than keeping it in cash or bank deposits.