What is the Japanese Financial Services Agency (FSA)? 

5 mins

What is the Japanese Financial Services Agency (FSA)?  

The Japanese Financial Services Agency (FSA) is the regulatory authority responsible for supervising the regulation of financial institutes. The financial institutes include banks, insurance companies, and credit firms. Originally, the FSA was known as the Financial Supervisory Agency, which was founded back in 1998 and later became the Financial Services Agency (FSA) in 2000. In Japan, after the Financial Reconstruction Act (FRA) was enacted in 1998, the Financial Reconstruction Commission (FRC) was created under it during the same year, in December. It was part of FRC’s duty to guide the Financial Supervisory Agency. Further, by July 2000, the old FSA reinstated into the new Financial Services Agency (FSA) and took over the FRC’s old functions during the following year. The FSA acts as the principal regulator, which means it is in charge of supervising Japan’s financial sector, including both large and small financial institutions.

What are the Main Functions of the FSA in Japan?

The Japanese Financial Services Agency (FSA), as dictated by the Prime Minister, has supervisory and regulatory authority over the financial firms, which also includes banks. It is part of FSA’s responsibility to ensure the stability of Japan’s financial system and that the bank’s depositors, investors, and policyholders are well protected from any kind of financial fraud. The job of FSA as an agency is to add order to the Japanese firm’s financial operations.

These functions are carried out by completing the following: strategic planning, framing policies for the financial sector, and inspecting and monitoring the private-sector FIs and banks. The planning and decision-making include rules that should be followed by FIs through legislation, such as the Banking Act, or the amendment of statutes and other regulations for businesses. Another establishment should be made for a steady financial system and the development of efficient markets so that the investors can conduct asset management and firms can raise better funds and capital.

Under the Banking Act, the Financial Services Agency (FSA) requires financial institutes to report their status of business activities and improve upon their management. Along with this, it can also ask the firms to suspend their businesses - partly or wholly, as a necessary action that ensures supervision. A set of guidelines have been published by the FSA to ensure the supervision of financial institutes, including banks. The guidelines are separate for banks smaller in size or regional FIs.

What are the FSA Regulations for Japan AML?

In Japan, the firms need to ensure the soundness of the financial system for which each entity or FI is required to establish and maintain solid risk management which is appropriate to the firm’s operations and standards. The FIs are required to implement certain measures to combat ML/TF, which is relevant to the changing global affairs and the evolving actions of the FIs against their external conditions. The firms are supposed to maintain effective risk management for ML/TF. This means that they need to identify and assess any potential risks instantly and effectively. This includes the risks related to customer’s operations and mitigates the risk with an appropriate risk-based approach. The ML/TF risk management process is a central function of the Financial Action Task Force (FATF) 40 Recommendations, which for some time, has been a part of different countries’ AML regulatory procedures. The financial institutes of Japan must establish a risk-based approach as a minimum standard for having effective procedures. The following are the certain measures that firms need to abide by in order to eradicate ML/TF:


  • Risk Mitigation: The firms are required to collect their customer’s information and verify it (based on their profile and account activity), so that the same data can be compared with the results of the risk assessment conducted on the select customer. The firm also needs to define and implement necessary and effective mitigation measures to reduce the identified risks. The firm will collect information about the customer, including their transactions and account activity, to compare it with the results of risk assessment and later implement measures to mitigate those risks. The firm shall also use enhanced measures of mitigation in cases of high ML/TF in order to be both sufficient to the risk levels posed by the customer and appropriate for the firm’s policies and standards


  • Customer Due Diligence: Under the AML/CTF measures, it is important that before building any business relationship with a client, the firm collects their information for verification and identification. The information can be related to who they are, what businesses they operate, who their beneficial owners are, what type of transactions are they willing to do, and the source of their funds. Following this, the firm will implement appropriate measures to mitigate any risks based on the collected and verified data. The CDD processes with a customer can be distributed into three different stages: the start, the continuation period, and the end of a business relationship. The firm needs to determine and establish the mitigation measures for each of these stages, based on the level of risk that the customer or their financial transaction poses. Based on all of the gathered information, the firm must then conduct an appropriate risk assessment of their customers


  • Transaction Monitoring and Screening: Under the AML/CTF measures, firms need to do transaction monitoring and screening of their customer’s transactions which can help to identify any unusual/suspicious transactions or else, any transactions that are subject to other sanctions. The unusual transactions would include the results of risk assessment for specific transactions of the select customer


  • Record-keeping: The firm needs to maintain all the necessary records that are needed for establishing appropriate AML/CTF standards, which also includes any evidence that is relevant to customers, information pertaining to their beneficial owner, and any transactional or communication-based records with the firm’s customers


  • Suspicious Transaction Reporting (SAR): Firms need to establish certain measures that can help to review any potential suspicious financial transactions. Also, if it can help determine whether Suspicious Transaction Reporting (STR) is required for that financial transaction. This process of reviewing and analysing is followed by taking the customer’s necessary data that is available to the bank. The information may include the customer’s profile, the nature of their business or financial transaction. This will ensure that the firm’s risk-management is strong and that it meets all of the regulatory obligations

About Japan’s Financial Regulator - In Conclusion

The Japanese financial regulator, the Financial Services Agency (FSA), helps to monitor financial institutes, including banks, insurance firms, and other financial industries. Apart from the FSA, the central bank that is known as the Bank of Japan (BOJ) and is like the lender of the last resort, is not a financial regulator on its own but its function includes maintaining the order of Japan’s financial system. The different global regulators want the financial regulations to fulfill three main goals in the financial sector: firstly, protect the firm’s customers; secondly, ensure the integrity and fairness of the financial markets; thirdly, ensure the financial institute’s stability. In order to fulfill the above mentioned goals, the Financial Services Agency (FSA) has instigated four main pillars which can help the financial institutions to instill better regulation:

  1. To make an appropriate combination of the supervisory approach, which is both rules-based and principles-based
  2. To respond effectively and instantly to any high-priority issues
  3. To encourage the voluntary efforts made by FIs and give a greater emphasis on their incentives
  4. To work on regulatory transparency and predictability of procedures


Read More: About the Financial Action Task Force (FATF) organization.