Japan regulators order banks to improve firewall rules

TOKYO - Sumitomo Mitsui Financial Group Inc SMFG has been told to devise measures to improve compliance by Japan's financial regulators after the group's banking and securities arms were found to have violated intra-group firewall rules.

The Financial Services Agency's order to Japan's second largest financial group could hamper the banking industry's lobby for further deregulation of rules that restrict the sharing of client information across banking and securities units within the same financial group.

The securities and banking arms of SMFG were found to have shared confidential information of several corporate clients without their consent on potential deals, including tender offers and mergers, according to a report by the Securities and Exchange Commission.

Japan's top three financial groups, both banking and securities units, have been asking the government to relax the firewall rules, which were introduced in 1993 and modelled on the now defunct U.S. Glass Steagall Act to prevent abuse of banks' dominant bargaining position. They say such rules are outdated and hurt their global competitiveness.

But the major economies with no firewall rules have stricter confidentiality regulation, such as Nomura Holdings Inc. and Daiwa Securities Group Inc. In Japan, bank loans are a dominant method for corporate financing, and they say that the risk of banks abusing their position is greater.

The Securities and Exchange Surveillance Commission has found violations at SMFG's securities unit SMBC Nikko Securities.

SMBC Nikko and six former executives have been indicted on market manipulation charges over the purchase of 10 individual stocks on the market, allegedly to push up their prices and make sure that block trade deals don't fall through.

The unit was ordered to halt its block trade business for three months and improve compliance. Before the scandal, SMBC Nikko had already suspended its block trade business, which had accounted for about 5 per cent of its annual trading revenue.

SMFG, which was ordered to make better operations at SMBC Nikko, released a joint statement with the securities unit saying that they will continue to take all necessary measures to make improvements and prevent recurrence.