Design of an Institutional Framework for Asset Formation by the Japanese People and the “Fiduciary Duty” of Financial Business Operators

To promote asset formation through investment by the Japanese people, the Financial Services Agency (FSA) of Japan has been striving to strengthen confidence in the capital markets by using terms such as “fiduciary duty” and “customer-oriented business conduct” to encourage financial business operators to behave in ways that serve customers’ interests. The first purpose of this paper is to clarify what meaning the term “fiduciary duty,” when written in Japanese katakana characters, is used to convey in the field of financial administration in Japan. Unlike its traditional meaning, the term “fiduciary duty,” as used by Japan’s FSA does not mean a duty that strictly regulates relationships of conflict of interests. Instead, it is an abstract concept in line with “respecting the interests of customers.” It may be said that the term “fiduciary duty” is being used as a catchphrase for strengthening confidence in the capital market. The second objective of this paper is to emphasize the following point by clarifying the traditional meaning of the term “fiduciary duty”: that (1) the need to protect investors due to a fiduciary relationship between financial business operators and investors, and (2) the need to protect investors who are at a significant disadvantage compared with financial business operators in terms of access to information and capabilities are two different matters each of which must be accurately distinguished and understood. As institutional and legal changes continue to be made frequently in the field of financial regulations, it is essential to be clear which of these needs justifies imposing various regulations. Finally, based on the understanding of the traditional meaning of the term “fiduciary duty,” this paper asks the following question: Is it justifiable to impose restrictions on financial product providers’ practice of making monetary or other forms of payment to sales companies in proportion to the amount of sales recorded by the sales companies? Companies providing non-financial products and services are not necessarily subject to such restrictions on payment of rebates to sales companies; therefore, if restrictions are to be imposed specifically in the case of financial products, it is necessary to make clear what justifies the imposition of the restrictions. For reference, we use Japan’s “Principles for Customer- Oriented Business Conduct,” “Regulation Best Interest” (also known as “Reg BI”), adopted by the U.S. Securities and Exchange Commission in June 2019, and rules applied to the healthcare industry, which has introduced strict restrictions.