Japan’s Investment Trust Reform Has Started At Last

January 27, 2017
by Noriyuki Morimoto

It was unfortunate that investment trusts in Japan were started as a securities firms’ business. This led to a very strong assumption that the sales company takes initiative.

Based on the legal relationship regarding investment trusts in Japan, management firms use sales companies to gather investors, and then entrust the collected money to a trust company (actually a trust bank). The investor becomes the beneficiary as a result of these arrangements.

In this relationship, it is the management firm which actually delivers the functions and responsibility of a trustee, while the trust company (the trustee in legal terms) handles administrative procedures. This has undermined clarity in the division of responsibility rather than reinforcing it, and a duplicated administrative process has been the cause of inefficiencies.

In reality, the sales company that controls communication with investors plans products based on its sales policies, and assigns a management firm for execution. Or (although this is essentially the same) the management firm plans products based on the sales policies of the sales company, to which it offers its products. Therefore, it can be said that the responsibility taken by the sales company should be at the core of the fiduciary duty of the investment trust.

However, the above still falls short of the ideal form of investment trusts. Rather than having the sales company lead the process, the management firm should plan products at their own initiative and control the sales company as a means to gather investors. In short, the management firm should be taking initiative of the business.

Moreover, as the core entity owing fiduciary duty, the trust company should take efforts to allocate responsibilities in a reasonable way. Within the tasks currently handled by the management firm, those other than management should be under the responsibility of the trustee or another company that takes on an administrative role.

It is encouraging that the Financial Services Agency (FSA) has launched a reform of the investment trust business. When the FSA said that each financial institution engaged in product development, sales, management, and asset administration should fulfill its fiduciary duty, we have to understand that the FSA has demanded for rational allocation of the overall fiduciary duty to each of the financial institutions engaged in each role, and to ensure fulfillment under check and balance.