‘Structured Bond’ Sales Undermined Public Trust in Financial Institutions

Administrative action is expected to be taken against financial institutions for improper sales and solicitations regarding high-risk financial products. Such acts undermine trust in banks. They should reflect seriously on their deeds.

The Securities and Exchange Surveillance Commission has recommended to the Financial Services Agency that the FSA take administrative action against Chiba Bank, its brokerage subsidiary Chibagin Securities Co. and Musashino Bank, mainly over problems with their sales of “structured bonds” that carried a risk of loss of principal.

The FSA intends to take actions such as issuing business improvement orders to them in the near future. The FSA must deal strictly with this issue, such as by requiring them to take thorough measures against recurrence.

Structured bonds are complex bonds that incorporate financial derivatives, and many of them claim to offer high yields. However, the prices fluctuate depending on indices such as stock prices and exchange rates, and there are some cases in which huge losses are incurred.

The Financial Instruments and Exchange Law states that products should be sold and customers should be solicited according to customers’ knowledge, experience and asset conditions. It is obvious that structured bonds are a product that should be sold only to customers who can understand the risks involved.

Nevertheless, according to the surveillance commission, Chibagin Securities continued to sell structured bonds for a long time without properly ascertaining the knowledge and experience of customers introduced by the two banks.

The securities firm had received many complaints about this sales practice, and had been warned three times by a securities industry organization. However, it did not respond to many of the complaints, sometimes brushing them off as “one-sided claims.” Such disregard for customers is despicable.

Musashino Bank, which has a business tie-up with Chiba Bank, also solicited customers for structured bonds with such alluring words as, “You can safely invest your funds and earn a little extra money.” The reason the banks engaged in this sales practice was that if customers whom bank employees introduced to the securities firm purchased the structured bonds, the sales results would be reflected in the employees’ sales performance.

Trust is the most important quality for a bank that collects deposits from customers. Chiba Bank is one of the nation’s largest regional banks, and its president until this month served as chairman of the Regional Banks Association of Japan. For those reasons, Chiba Bank bears particularly heavy responsibility.

The problem is not expected to be limited to these three financial institutions. According to the FSA, about 80% of regional banks in Japan were handling structured bonds as of the end of March 2022.

A nonprofit organization that accepts complaints about financial products said that it received complaints including one that “I suffered a loss of about ¥36 million without fully understanding the situation” and another that “I lost about ¥23 million of my retirement allowance, even though I wanted a safe investment.”

Banks, whose earnings from profit margin have dwindled due to ultra-low rates, reportedly considered structured bonds as a new source of revenue. Although many banks have now stopped selling structured bonds, it is essential for the FSA to consider this a problem for the financial industry as a whole and make financial institutions implement again thorough measures for a “customer-oriented” sales approach.

(From The Yomiuri Shimbun, June 23, 2023)