Logos of the Mitsubishi UFJ Financial Group and Mitsubishi UFJ Bank.
Based on the Financial Instruments and Exchange Act, the Financial Services Agency (FSA) has ordered one bank and two brokerage firms under the control of Mitsubishi UFJ Financial Group Inc (MUFG) to rectify their business practices.
This came after the companies were discovered to have shared undisclosed information about customer businesses among themselves without permission. Authorities determined that the bank and brokerages had violated provisions of the Act. The law is designed to maintain a firewall between banks and investment firms by restricting the information they can share.
It demonstrates Japan's largest financial group's appalling lack of awareness of the need for compliance with laws and regulations. Furthermore, it shows the inadequacy of the group's governance mechanism. In both cases, the responsibility of MUFG management is heavy. Naturally, it is expected to take effective measures to prevent recurrence.
Inappropriate Sharing
The three companies that violated the law were MUFG Bank, Mitsubishi UFJ Morgan Stanley Securities Co, and Morgan Stanley MUFG Securities Co. Earlier, the Securities and Exchange Surveillance Commission recommended that the FSA take punitive administrative action against firms that had violated the law.
Authorities refrained from taking serious action against the holding company MUFG. Instead, they only required it to review its supervision and submit reports per the Banking Act. However, MUFG clearly should also take responsibility. It had turned a blind eye to the shady practices going on within the group.
Mitsubishi UFJ Bank provided the two group securities firms with non-public information about client companies. That involved information such as their stock offerings and corporate acquisitions. A senior executive officer at the bank personally engaged in the illicit sharing of privileged information on at least 10 occasions. Meanwhile, the securities firms used the confidential information to elicit contracts.
Other violations involved business practices off limits for banks. Those included enticing customers to engage in transactions with the securities companies as a precondition for customers to obtain bank financing.
Weak Reaction
Nevertheless, the series of violations were judged not to have involved the bank abusing its dominant bargaining position to pressure client companies to take part in unfair transactions. However, MUFG demonstrated sloppy information management and a lack of awareness about the duty for compliance. Thus it seriously undermined its credibility as a financial group. Compliance with laws and regulations was given short shrift in a drive to expand profits. If that happened, we would have to conclude that the roots of the problem run deep.
Regulations mandating firewalls were put in place to maintain a fair competitive environment for banks and security companies. They have been gradually relaxed in response to calls from the banking industry to strengthen its international competitiveness.
Evidently, the Japanese government is also considering further relaxing the regulations. However, there have been a series of discoveries of inappropriate behavior within the industry. Those include similar abuses at the Mitsui Sumitomo Financial Group that were brought to light in 2022.
The financial sector should take seriously the possibility that these transgressions could call into question the drive for deregulation.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
