On 29 May 2019, the Japanese Financial Services Agency ("JFSA") published a draft report on a proposal to amend the current regulations on fund settlement, including those on funds transfer business. The proposal calls for a re-categorization of the current funds transfer business from a single category into three categories. Each new category will have a different security level and a set of regulations reflecting their security level.
THE CURRENT REGULATION
Under the Banking Act, funds exchange transactions (kawase-torihiki), which include funds transfer service, are only permitted to be undertaken by entities with banking licenses. However, the Act provides an exception to this licensing requirement, by allowing non-banks to perform funds exchange transactions provided that the amount of each transaction is less than JPY1 million if these non-banks register as funds transfer service providers under the Payment Service Act.
JFSA'S PROPOSED REGULATION
The JFSA's report proposes to divide the current single funds transfer business scheme into 3 categories: "large sum," "current scheme," and "small sum." Each different category will have its own set of regulations to strike a balance between the risks and the benefits the government aims to achieve.
1. Large sum
"Large sum" will be a fund transfer where the amount goes beyond JPY 1 million. Large sum funds transfer service will be subject to a more rigorous regulations than the rules imposed under the current scheme. This is because "large sum" funds transfer service will venture into a realm previously reserved exclusively to banks with proper banking licenses. Therefore, in order for a funds transfer service provider to deal with large sum of money, it is reasonable to impose a more rigorous regulations at a similar level of those imposed on banks to protect the consumers and to combat illegal activities such as money laundering.
It is with this regard that the policy makers are considering imposing rules such as setting a maximum time period for which a fund can be withheld by a funds transfer service provider before such fund has to be transferred and forbidding these funds transfer service providers from withholding money any longer than it is deemed necessary. The policy makers are also considering about implementing a stricter supervision and monitoring scheme on these service providers' system and operation risk management protocol.
2. Current scheme
As the name implies, funds transfer service providers that fall under the "current scheme" category will follow the current regulation scheme and remain mainly unchanged. There are discussions on whether to impose an upper limit on how much money one can deposit into her account, as well as setting that upper limit to equal to the transfer limit of JPY1 million, to reduce risks. However, this idea has been criticized by Japan Association of New Economy (JANE) and Fintech Association of Japan (FAJ) as it can create inefficiency and unnecessary burden for certain customers. These individuals include someone who may be expecting to receive a large payment right before remitting her own within the same time period. This proposed rule will prevent the fund from being deposited properly. It will also be burdensome for certain users who may be expecting to receive funds from various sources within a time frame where the total exceeds the upper limit.
3. Small sum
The exact amount of "small sum" has not yet been defined, but it is expected to be in a range that is just under a few tens of thousands of JPY. In order to ease on the current regulation, a balance between the risk taken and the efficiency gained as well as consumer protection all still have to be considered. To qualify under the relaxed "small sum" regulation scheme, both the amount of fund transferred per transaction and the total fund received per account/person should both be considered "small sum."
The key question will be on how much a "small sum" is. If the amount is set to be low and impractical, it may hinder the success of this new funds transfer category.
The following issues will also be considered for the amendment of the funds transfer regulations.
- Securities and insurance on the fund deposited to the service providers and the problems with time-lag.
- Remedies on payment transfer where a recipient account having reached its upper deposit limit.
The proposed amendment to regulations on funds transfer business is still in a relatively early stage of discussion by JFSA and its internal councils. We will continue to follow-up closely on new developments.