The Consumer Finance Law Review: Japan
Except for limited matters such as the prohibition on high interest rates and excessive lending, consumer finance services are not specifically regulated in Japan but are instead subject to basically the same regulations that apply to wholesale finance services. In light of the shift towards digitalisation, regulations on consumer finance services have been updated and continue to develop to meet evolving changes and challenges in many stages and many areas. The prevailing trend veers towards further relaxation of regulations in order to promote digitalisation in Japan to allow local consumers to enjoy and benefit from new services, rather than towards the strengthening of consumer protection regulations.
Legislative and regulatory framework
Japanese consumer finance services are not regulated by a single uniform statute. Instead, payments, banking (both deposits and lending), non-bank lending and sales finance are separately regulated by the Payment Services Act (Act No. 59 of 2009), the Banking Act (Act No. 59 of 1981), the Money Lending Business Act (Act No. 32 of 1983) and the Instalment Sales Act (Act No. 159 of 1961), respectively.
In addition to the foregoing distinct laws, there are also laws that apply to financial and non-financial businesses in general. These general laws include the Consumer Contract Act (Act No. 61 of 2000), which prohibits any business operator from imposing certain unfair clauses in the terms and conditions of business with consumers, and the Act against Unjustifiable Premiums and Misleading Representations (Act No. 134 of 1962), which regulates advertisements and campaigns offering bonuses to consumers.
The Payment Services Act, the Banking Act and the Money Lending Business Act are enforced by the Financial Services Agency (FSA), while the Instalment Sales Act is enforced by the Ministry of Economy, Trade and Industry (METI). There are some overlaps in the laws and the jurisdictions of regulators. For instance, the issuance of credit cards is regulated by the Instalment Sales Act; thus, a card-issuing bank must not only be licensed as a bank by the FSA but must also be registered with METI to issue a credit card. Similarly, most non-bank credit card companies provide non-bank lending that is regulated under the Money Lending Business Act; thus, they must be registered with both the FSA and METI.
The Consumer Contract Act and the Act against Unjustifiable Premiums and Misleading Representations are both enforced by the Consumer Affairs Agency (CAA). Further, the Consumer Contract Act authorises consumer advocates' organisations that have been certified by the CAA (the Qualified Consumer Organisations) to seek injunctions against business operators' activities that violate those two aforementioned laws. In this regard, some Qualified Consumer Organisations are quite active in pursuing consumer protection in the area of consumer finance.
Although cash is generally preferred in Japan compared to other countries, owing to the recent government policy of promoting cashless payments, including by providing financial subsidy, and the growing aversion to cash as a measure against the covid-19 pandemic, cashless payment is growing in popularity and use.
Under the Payment Services Act, there are two types of payment services, namely, the issuance of 'prepaid payment instruments' and 'fund transfer services'.
Prepaid payment instruments
Prepaid payment services such as prepaid cards, gift certificates and electronic money are regulated under the Payment Services Act as 'prepaid payment instruments'. Issuers of prepaid payment instruments that may be accepted by third-party merchants must be registered under the Payment Services Act. On the other hand, issuers of prepaid payment instruments that may be accepted only by the issuers themselves are required to file a notification under the Payment Services Act, but only if the outstanding balance of the issued prepaid payment instruments as of any recorded date (which is each of the last days of March and September) exceeds ¥10 million.
Funds transfer services
Payment services that can be used not only for payments but also for balance refunds and peer-to-peer remittances are categorised as 'funds transfer services'. In principle, only banks and depository financial institutions are allowed to conduct funds transfer services. However, certain funds transfer services may also be provided by other entities that are registered as 'funds transfer service providers' under the Payment Services Act. The Payment Services Act, which took effect in 2010, established a system of funds transfer service providers that can conduct funds transfer services of not more than ¥1 million per remittance by registration only, without needing a bank licence. The law was amended in June 2020 to significantly change the regulations on funds transfer services (see below).
ii Recent developments
Reform of the regulations on funds transfer services
The June 2020 amendments to the Payment Services Act, which took effect on 1 May 2021, categorised funds transfer services into (1) Type I funds transfer services (newly established), which may handle large-sum remittances, (2) Type II funds transfer services, which correspond to funds transfer services under the previous regulations, and (3) Type III funds transfer services (newly established), which may handle only small-sum remittances, and set up a flexible regulatory structure that can adapt to the values and risks of remittances for each category.
The following table sums up the categories under the amended Payment Services Act. Any entity providing funds transfer services in Japan must be licensed as a funds transfer service provider under a category below, depending on the services being provided.
|Category||Maximum remittance amount||Entry regulation||Holding of user funds||Securing user funds|
|Previous regulations||Previous funds transfer services||¥1 million||Registration||N/A||Security deposit and guarantee can be used together (trust cannot be used with deposit or guarantee)|
|New regulations||Type I funds transfer services|
|No limit||Type I registration and approval of the business implementation plan||User funds may be held only if there are specific remittance instructions and the remittance is conducted immediately (strict retention restrictions)||Security deposit, guarantee, and trust can be used together|
Securing of user funds in a timely manner
|Type II funds transfer services (equivalent to previous regulations)||¥1 million||Type II registration||Must request withdrawal of funds not related to remittance if user funds held exceed ¥1 million|
|Type III funds transfer services|
|¥50,000||Type III registration||Cannot receive user funds in excess of ¥50,000||Can manage funds as separate deposits, in lieu of a security deposit with an official depository, and other existing protection methods (outside auditing required)|
Collection agency services
As discussed above, payment services are generally regulated by the Payment Services Act and other financial regulations. However, collection agency services, which receive payments from consumer payers (debtors) on behalf of business operators that have monetary claims against the debtors under sales contracts, are often used in the fintech sector as they are exempt from the Payment Services Act and other financial regulations, and therefore are not subject to licensing or anti-money laundering requirements. This relaxation of regulations has been justified on the grounds that consumer payers also benefit from the smooth and safe use of collection agency services. As collection agency service providers are authorised to receive payments on behalf of creditors, the credit risk of collection agency service providers are shouldered by business operators and not by consumers.
However, the amended Payment Services Act, which took effect in May 2020, narrowed the scope of exempted collection agency services by generally requiring that the payees (creditors) must be business operators, with certain exemptions. The amended law continues to provide exceptions where the payees (creditors) are individuals if (1) the underlying commercial transaction is carried out on an online platform where the platform provider plays an essential role in the formation of the contract regarding the commercial transaction, or (2) the transaction comprises escrow services.
On the other hand, collection agency services where the payee is a corporation or a sole proprietor would not be subject to the regulations after the amendment of the Payment Services Act. Therefore, foreign payment service providers that provide services in Japan would be exempted from the Payment Services Act and other financial regulations if they provide collection agency services only to merchants that are corporations or sole proprietors.
For the protection of employees, under current Japanese labour law, wages are, in principle, allowed to be paid only in cash or by remittance to bank accounts or certain securities accounts of the employees. However, for the convenience of employees, the introduction of payroll services, where wages can be paid to the account of a designated funds transfer Service provider, is currently under consideration by the council organised by the Ministry of Health, Labour and Welfare. If the existing regulation is relaxed, a wider variety of payment services could be offered and more extensively used.
Deposit accounts and overdrafts
There are three ways of setting up a business to provide deposit accounts to consumers in Japan, namely: (1) any person may establish a corporation with a banking licence in Japan, (2) a foreign bank may establish a branch with a banking licence in Japan, and (3) a foreign bank may establish a branch with a banking licence and an agency licence in Japan to intermediate deposit accounts held with a foreign head office or another branch of that foreign bank outside Japan. While the deposit accounts that may be provided basically do not differ between these three arrangements, the applicability of deposit insurance differs (discussed below).
Japanese banks generally provide deposit accounts to consumers, and most consumers use deposit accounts for broad purposes such as receiving salaries and pensions and paying taxes, utilities and credit card bills. Although banks may refuse to open a deposit account even without any reason, banks in practice only do so where there is a justifiable reason. From a regulatory perspective, banks typically refuse to open deposit accounts in two cases. One case is where, after the screening of information provided by the National Police Agency or other sources, the account holder is identified as or is suspected to be an 'antisocial force' (which is a defined term under Japanese law and includes specified activities such as involvement with organised crime). That screening is required by FSA guidelines. The other case is where there is a high risk of money laundering. As there have been many cases of foreigners illegally selling their deposit accounts to crime groups when they leave Japan, most banks require non-Japanese individuals to submit residency period certificates to banks and close deposit accounts when the residency period expires. However, the FSA's Guidelines on Anti-Money Laundering and Countering Financing Terrorism require banks not to reject prospective customers merely as a result of the bank's efforts against money laundering or to counter financing terrorism, unless there is a reasonable ground.
Overdrafts may be provided to consumers under a banking licence for deposit accounts as discussed above. Banks, however, may refuse to provide overdrafts to consumers without any reason.
Under the Deposit Insurance Law, Japanese yen-denominated deposits held with banks located in Japan (including subsidiary banks of foreign banks) are protected by the deposit insurance system administered by the Deposit Insurance Corporation. Deposits held with Japanese and non-Japanese branches of non-Japanese banks and with non-Japanese branches of Japanese banks are not covered by this insurance. The insurance proceeds may be paid in the case of a suspension of deposit repayments, licence revocation, dissolution or bankruptcy of a financial institution. Payouts are generally limited to a maximum of ¥10 million of the principal amount, together with any accrued interest, for each depositor. Only non-interest-bearing deposits, redeemable on demand and used by depositors primarily for payment and settlement functions, are protected in full.
ii Recent developments
Negative interest and account maintenance fees
The Bank of Japan introduced its negative interest rate policy in 2016 and many market interest rates of Japanese yen are negative or very low. Owing to such an environment, banks are considering applying negative interest rates on deposits or charging account maintenance fees. It is the general view that banks are not allowed to apply negative interest rates unless the account holders explicitly agree, but banks may charge account maintenance fees by amending the terms of the deposit accounts to the extent allowed under the Civil Code. The Civil Code permits business operators, including banks, to amend the terms of service to an extent reasonable.
Inactive deposit accounts
In 2018 the Act on Inactive Deposit Accounts took effect. That law requires banks to transfer the balance of deposit accounts that have been inactive for more than 10 years to the Deposit Insurance Corporation. As a result of this transfer, the account holder loses the deposit at the bank but acquires a claim for repayment against the Deposit Insurance Corporation. Banks administer the repayment arrangements on behalf of the Deposit Insurance Corporation.
Unauthorised deposit withdrawals
A special law to protect consumers from unauthorised deposit withdrawals through the use of counterfeit or stolen bank cards in an automated teller machine was enforced in 2005. Under that law, an unauthorised deposit withdrawal by a counterfeit or stolen card must be fully compensated by banks, although only three-quarters of the withdrawn amount will be compensated if this unauthorised deposit withdrawal is attributable to the account holder's negligence. The Japanese Bankers Association also publicly released its guidelines on the compensation of unauthorised deposit withdrawals using online banking services.
The year 2020 saw a rise in the unauthorised debiting of deposit accounts for topping up payment service values. To address this issue, the Japanese Bankers Association and the Japan Payment Service Association, which is a self-regulatory body of funds transfer service providers, issued their respective guidelines in 2020, which recommended that banks and funds transfer service providers enter into agreements with account holders regarding the compensation of losses incurred by account holders.
Banks' consumer lending practices
Bank overdrafts and credit lines are regulated by the Banking Act and are not subject to consumer protection requirements under the Money Lending Business Act, including the statutory total lending limit of one-third of the annual income of the consumer borrower that was introduced in 2010 to address excessive consumer borrowing. Thereafter, however, after banks increased consumer lending that in turn received increased public attention, in 2017 the Japanese Bankers Association published a statement that the banking industry will take measures to address excessive consumer borrowing. Accordingly, banks are expected to avoid using enticing expressions in consumer credit advertisements and to perform rigid credit screening, including reviewing income and total borrowing.
In Japan, credit cards have two functions: (1) paying for goods and services (shopping function); and (2) borrowing funds for general purposes (cashing function).
Services for item (1) require registration of the Intermediation of Comprehensive Credit Purchases business under the Instalment Sales Act, whereas services for item (2) require a bank licence under the Banking Law or a moneylending business registration under the Money Lending Business Law.
Credit card issuers include both banks and non-banks. The cashing function of non-bank-issued credit cards is subject to the Money Lending Business Act, which provides for certain regulations such as that lending cannot exceed one-third of an individual customer's annual income, the so-called total volume regulation, paper delivery obligations, and other regulations regarding the issuer's actions. As there are no similar regulations under the Banking Act, it is possible for bank-issued credit cards to have more flexibility in providing cash advance services. However, as discussed above, banks are expected to avoid using enticing expressions in consumer credit advertisements and to perform rigid credit screening, including reviewing income and total borrowing, similar to the regulations under the Money Lending Business Act.
ii Recent developments
Enhancement of credit screening
Credit card issuers are required to conduct a standardised credit screening stipulated by the Instalment Sales Act when they issue credit cards, including using credit information obtained from a consumer credit information organisation designated by METI. This screening is required to prevent excessive consumer debt, but these screenings take time before credit cards can be issued and can be inconvenient for both consumers and card issuers. To mitigate the inconvenience, the amended Instalment Sales Act, which took effect in March 2021, partly relaxed this requirement so that certified issuers and registered issuers of credit cards with a credit limit of up to ¥100,000 are exempt from the conventional standardised credit screening and may conduct credit screening using technology and big data. This legal development is expected to lead to the use of credit screening using AI and big data.
Acquirer/payment service provider
Based on the view that removing low-quality merchants from the credit card market is necessary to protect consumers, new regulations applicable to the acquisition of merchants were introduced by the amended Instalment Sales Act, which took effect in June 2018. The amendment law introduced registration requirements for the acquiring service of a merchant that accepts credit cards. Under the amended Instalment Sales Act, acquirers or intermediary service providers that have the final decision in acquiring merchants and in entering into merchant agreements are required to register as credit card number handling contractors, which are subject to several obligations, such as investigations of merchants and proper management of customer credit card numbers. On the other hand, if a third party has the final authority to make the decision to enter into merchant agreements and an acquirer or an intermediary service provider only supports the processing of credit card payments, then such an acquirer or an intermediary service provider does not need this registration.
If foreign credit card issuers intend to onboard merchants in Japan through an acquirer, the issuers must appoint an acquirer that is registered as a credit card number handling contractor. In addition, even in cases where there is a merchant agreement between a foreign acquirer and a foreign merchant for a Japanese issuer, if a Japanese consumer can use the credit card to purchase goods or services from the foreign merchant, the foreign acquirer is required to be registered as a credit card number handling contractor.
Residential mortgages can be provided to Japanese consumers under a banking licence for deposit accounts. Banks are free to refuse to provide a residential mortgage to a consumer for any reason.
Under the supervisory guidelines of the FSA, banks are required to provide appropriate information including interest rate fluctuation risks for the mortgage with a floating interest rate or a partial fixed interest rate. In 2004, the Japanese Bankers Association issued guidelines with regard to the types of information that must be disclosed to borrowers in relation to interest rate fluctuations.
Car financing and other sales finance
Banks and other finance companies, including captive finance companies for cars or other products, must be registered with METI. This business is regulated by the Instalment Sales Act, which imposes consumer protection requirements that are higher than those under the Banking Act. In particular, banks and other finance companies are required to calculate a statutory credit limit using the statutory formula and to refer to the borrowing amount registered by those finance companies with one of the consumer credit information organisations designated by METI.
The servicing of non-performing mortgages and product finance instalments can be conducted by the creditors themselves or outsourced to licensed attorneys or servicers.
ii Recent developments
'Buy now, pay later' service
As discussed above, car financing and other sales finance are generally regulated under the Instalment Sales Act. However, whole instalments that are scheduled to be paid within two months are not subject to this regulation. For this reason, the buy now, pay later service is often designed so that whole instalments are paid within two months.
Since the provision of credit lines, but not the financing of specific goods or services, is subject to know your customer requirements, the buy now, pay later service is often designed so that financing is granted only after the purchase of certain goods or services and only for the purpose of paying the price of goods or services.
i Electronic payment service providers
Registration with the FSA is required for electronic payment services where a third-party service provider transmits payment instructions to banks or retrieves account information from banks, most typically through an application programming interface (API) that banks are obliged to endeavor to provide. In addition, electronic payment service providers and banks are required to execute an API licence agreement covering how each party will compensate losses incurred by users and what measures each will take to secure users' information.
ii Customer loyalty programmes
In Japan, many retail and e-commerce companies actively offer customer loyalty programmes in which customers can earn points (credits) that they can use to pay for goods and services. These points function similarly to value in prepaid services (some points are convertible to prepaid service value), but are free from prepaid service regulations as long as the points are issued in exchange for a purchase of goods and services. The number of points that can be issued for each transaction is regulated in the notice issued by the CAA pursuant to the Act against Unjustifiable Premiums and Misleading Representations.
i Maximum interest rate regulations
One of the most important regulations applicable to consumer protection in the Japanese financial sector is the statutory maximum interest rate. The following is an overview of the maximum interest rate regulations on consumer credit.
The Interest Rate Restriction Act and the Act Regulating the Receipt of Contributions, the Receipt of Deposits and Interest Rates (the Capital Subscription Act) apply to loans. Under the Interest Rate Restriction Act, which is incorporated into the Civil Code, the maximum interest rate varies depending on the principal amount: the maximum interest rate is 20 per cent per annum if the principal amount is less than ¥100,000, 18 per cent per annum if the principal amount is ¥100,000 or more but less than ¥1 million, and 15 per cent per annum if the principal amount is ¥1 million or more. Interest contracts in violation of the interest rate cap regulations under the Interest Rate Restriction Act are void.
The maximum rate under the Capital Subscription Act is 20 per cent per annum. As this act is a criminal law, a criminal penalty is imposed for violations of the maximum interest.
The concept of 'interest' under the foregoing laws includes fees and other charges in connection with the loan, subject to certain statutory exceptions. Accordingly, the sum of the interest and commissions payable under the loan contract must be less than the maximum interest rates described above.
ii Excessive lending
Loan transactions of moneylending business operators registered with the FSA are subject to the total volume restriction, which prohibits the granting of loans that account for more than one-third of the borrowers' annual income. Certain loans, such as housing loans, are exempt from the total volume restriction.
Although total volume restrictions do not apply to bank loan transactions, the Japanese Bankers Association has issued its statement that member banks will take measures against excessive lending so that banks are expected to take these measures by considering the regulations under the Money Lending Business Act.
In sales finance, the Instalment Sales Act prohibits lenders from extending credit beyond the estimated amount payable calculated based on the following statutory formula:
Estimated amount payable = annual income - estimated annual billing - living maintenance costs.
iii Collection restrictions
The Money Lending Business Act provides that the collection of loans cannot be done in a way that disturbs the peace of a person's private life or business. Hence, the following actions, as examples, are prohibited:
- calling the borrower or visiting the borrower's home before 8am or after 9pm without a justifiable reason;
- calling or visiting a place other than the borrower's home without a justifiable reason; and
- not leaving the borrower's residence or place of work after being asked to do so.
Consumer Contract Act
The Consumer Contract Act applies to any consumer business including any consumer financial service. The law invalidates certain contractual clauses such as the payment of break-up fees that exceed the amount needed to compensate for average losses and those adverse to consumers when compared to the default rule under the Civil Code. Thus, a fixed amount of prepayment fees may be viewed as being in conflict with the law if the fixed amount exceeds the average losses.
i Enforcement actions
Currently, there are no cases relating to material administrative punishment by administrative authorities in Japan in the consumer credit sector, but the following are the recent emerging trends.
METI's administrative order
Sales finance providers registered with METI are required to investigate a merchant if a consumer files a complaint regarding a transaction with the merchant. Since, as discussed above, removing low-quality merchants from the market is considered necessary to protect consumers, METI has focused on the enforcement of this requirement and in 2019 issued administrative orders to sales finance providers to take remedial measures in this regard.
There are no specific areas of concerns. However, when moneylending business operators are in serious violation of the Money Lending Business Act and their internal control system is not sufficient to prevent such serious violation or its recurrence, the FSA tends to impose administrative punishments on the those operators.
Mobile network operators have recently started providing electronic payment services using smartphones under a funds transfer service or prepaid service registrations, or both. These payment services allow bank account funds to be debited to top up the value held with the funds transfer service or prepaid service. In 2020, there were fraudulent fund transfers through the use of this transfer service or prepaid services because of security vulnerability. In response, the FSA ordered mobile network operators to report on the actual status of fraudulent uses and measures to prevent a recurrence of this misuse, and banks have been asked to strengthen the security of deposit accounts.
ii Disputes before the regulator
Currently, there are no disputes before the regulator in the consumer credit sector. Although, prior to the amendment of the Money Lending Business Act in 2006, which introduced severe regulations on moneylending business operators, the problem of excessive consumer debt attracted attention from consumer activists and politicians; now moneylending business operators are conducting their businesses in compliance with the amended law.
Before the amendments to the Interest Rate Restriction Act and the Capital Subscription Act in 2010, there was a discrepancy between the two statutes: the maximum interest rate was 29.2 per cent per annum under the Capital Subscription Act and 15 per cent per annum (if the principal amount is ¥1 million or more) under the Interest Rate Restriction Act. Under the Money Lending Business Act, prior to its revision that took effect in 2006, moneylending business operators were allowed to receive interest rates exceeding the upper limit of the Interest Rate Restriction Act but below that of the Capital Subscription Act if the repayment was made voluntarily.
In 2006, however, a Supreme Court precedent tightened the interpretation of 'borrower's voluntary repayment', which led to the conclusion that the general practice of most moneylending business operators at that time failed to satisfy 'voluntary repayment'. As a result, moneylending business operators were deemed to have overcharged interest and became liable to borrowers for unfair gain. This led to a sharp increase in actions for compensation for unjust enrichment. However, as more than 10 years have passed since 2010, when corresponding amendments to related laws took effect, the statute of limitations under the Civil Code for unjust enrichment has expired in most cases so that actions seeking compensation for unjust enrichment for overcharged interest are now decreasing and are expected to cease in the near future.
As discussed above, the Japanese consumer finance sector has been strongly supported by the government's policy of deregulating that sector with the aim of realising a digital-friendly business environment and offering innovative services to consumers. Although we could anticipate that new regulations, especially self-regulatory measures, will continue to be initiated to respond to specific problems, as seen in the cooperation between the banking and fintech industries to address the recent 2020 outbreak in unauthorised deposit withdrawals, we could also foresee further deregulation to continue the evolution of or even accelerate advances in the consumer finance sector of Japan.
1 Takanori Ishikawa is a partner, Masaki Yukawa is counsel and Ryo Yoshino is a senior associate at Mori Hamada & Matsumoto.