Client Alert

Update on Reforms to Japanese Regulations for Non-Bank Fund Transfer Services and Other Amendments to the Payment Services Act

15 Jul 2020

On June 5, 2020, the Diet of Japan adopted several amendments[1] to the Payment Services Act (Act No. 59 of June 24, 2009) (the “PSA,” and such amendments collectively, the “Amendment”). The Amendment includes reforms of the licensing/registration system for fund transfer service providers, introduction of several categories of fund transfer services, and certain enhancements to regulations on the issuers of prepaid payment instruments.

By way of background, in December of 2019, a “Working Group” of the Financial Services Agency (“FSA”) published a report[2] proposing changes to the PSA and other relevant statutes regulating the provision of settlement services and financial intermediary services in Japan (the “Report”)[3]. The Amendment largely reflects and adopts the proposals related to the settlement services in the Report, but details including the threshold amounts dividing the classes of the registrations and other details have been delegated to Cabinet Orders and/or regulations to be published by the FSA. The FSA typically publishes draft regulations, which will come into effect at the same time with the Amendment, for public comments a couple of months prior to their taking effect. The Amendment will come into effect on a date to be determined by a Cabinet Order (but in any event within one year from its publication[4]).

Below is a summary of the Amendment.

Introduction of Three Different Regulatory Categories of Fund Transfer Services

1. In Japan, “fund transfer services” (or payment settlement services, which have been defined by court cases very broadly to mean “services to intermediate payments between locations with some distance, without physical transportation of cash between such locations” – note that such definition has not been modified or supplemented by subsequent statutory amendments) could previously only be provided by licensed, deposit‑taking financial institutions. This restriction was amended and loosened in 2009 with the enactment of the PSA. Under the PSA, an entity registered with the FSA, even if not licensed as a deposit-taking financial institution, could still provide fund remittance services subject to certain restrictions. The major restrictions applied to registered fund transfer service providers that were not licensed as a deposit-taking financial institution are: (a) a limitation on the maximum remittance amount per transaction of JPY 1 million (approximately USD 10,000); and (b) a requirement that, at any given time, the service provider have an amount of cash deposited with a governmental agency in an amount equal to at least the total value of the remittances for which the service provider has received funds from customers but has not yet completed the applicable remittance transaction (this deposit may be substituted by a bank guarantee or by maintaining a trust account).

2. The Amendment introduces the following three different classes of fund transfer businesses. A fund transfer service provider may engage in or provide services in more than one class of the fund transfer businesses.

(1) Type I Fund Transfer Businesses

This category is for fund transfer business other than Type II and Type III.[5] In effect, fund transfer businesses in this category will not have a particular statutory limit imposed on the maximum amount of each remittance.

In order to operate a Type I Fund Transfer Business, the fund transfer service provider must: (a) register with the FSA, designating the Type I Fund Transfer Business as an applicable category for the fund transfer business it operates[6]; and (b) obtain advance approval from the FSA on its operational plan for such business, describing the following:[7]

(i) If any maximum amount per fund transfer is set, such amount;

(ii) Methods used by the fund transfer service provider to administer the electronic data system used for fund transfer transactions; and

(iii) Any other matters to be designated by the FSA regulations.[8]

If the fund transfer service provider contemplates or wishes to change any matter relating to the above, advance approval of the FSA concerning such change must be obtained, except under circumstances as designated by the FSA regulations for which post-facto notification would be sufficient.

(2) Type II Fund Transfer Businesses

This category is for fund transfer businesses that deal with remittances in amounts not exceeding an amount to be designated by Cabinet Order.[9] Because existing fund transfer service providers registered under the current PSA will be deemed to be registered for Type II, such threshold amount would most likely be equal to the current maximum remittance amount applicable for registered fund transfer service providers, which is JPY 1 million (slightly less than USD 10,000 under the recent currency exchange rate).

(3) Type III Fund Transfer Businesses

This category is for fund transfer businesses that deal with remittances in amounts not exceeding a particularly small amount to be designated by the Cabinet Order.[10] In the Report, JPY 50,000 was suggested as the threshold amount for the category corresponding to Type III under the Amendment, but the actual amount for this threshold will not be revealed until the publication of the draft amendments to the Cabinet Order.

3. The Amendment requires fund transfer service provider to post security deposits (“Performance Security Deposit”) to protect the customers, which differ from class to class as described below. If a fund transfer service provider engages in more than one class of fund transfer business, it must post a deposit for each class, calculated as described below in the manner prescribed for each such class.

(1) A fund transfer service provider engaged in a Type I Fund Transfer Business is required to post a Performance Security Deposit for its Type I business in an amount not less than the sum of (i) its total outstanding liabilities to users in Japan arising from its Type I Fund Transfer Business, calculated for each business day (“Outstanding Liabilities”), and (ii) the amount prescribed by the FSA regulations as expenses relating to the enforcement of the security[11] (“Enforcement Expenses,” and the sum of the Outstanding Liabilities and the Enforcement Expenses, the “Required Performance Security Amount”). Such Required Performance Security Amount must be posted within the period prescribed by the FSA regulations (not to exceed one week) after the relevant business day. In effect, this means that a fund transfer service provider engaged in a Type I Fund Transfer Business must monitor the Required Performance Security Amount on a daily basis and may be required to adjust the amount of the performance security actually posted on a daily basis.[12]

The Performance Security Deposit must be posted by making a cash deposit with the office of the legal affairs bureau[13] that has jurisdiction over the location of the principal business office of the fund transfer service provider. Alternatively, on the condition that an advance notification is filed with the FSA, all or part of the performance security may be posted in the form of a performance bond issued by a bank that satisfies certain criteria prescribed by the FSA regulations, in the form of a trust contract with a trust bank or a trust company, or a combination thereof. The amended PSA makes available this combination of the bank performance bond and a trust account, and thus provides fund transfer service providers with more flexibility.

(2)  A fund transfer service provider engaged in a Type II and/or Type III Fund Transfer Business is required to post the Performance Security Deposit for its Type II and/or Type III business in an amount no less than the greatest daily Required Performance Security Amount applicable to its Type II or III business, calculated for each business day during the relevant deposit calculation period. The duration of each relevant deposit calculation period is to be determined by the fund transfer service provider for each such business that it engages in (provided that each such period shall not be longer than one week), and the fund transfer service provider must deposit the applicable Performance Security Deposit within the period prescribed by the FSA regulations after the end of each such deposit calculation period[14].

Acceptable methods to post the Performance Security Deposit are the same as (1) above, subject to an exception available only to Type III Fund Transfer Businesses, which are discussed in (3) below.

(3) A fund transfer service provider engaged in a Type III Fund Transfer Business may elect to maintain all or part of the Performance Security Deposit in a deposit account opened with a financial institution that is segregated from other assets of the service provider. In order to do so, the fund transfer service provider must file a notification with the FSA describing certain matters prescribed by the amended PSA[15] and the amended FSA regulations. Fund transfer service providers that have elected to use this method must ensure that the administration of such deposit account is regularly audited by a CPA or an accounting firm in a manner to be prescribed by the amended FSA regulations. In addition, periodical reporting on the administration of the Performance Security Deposit is required as prescribed by the amended FSA regulations (not less frequently than once every six months).

4. Express provisions to restrict the fund transfer service providers from holding users’ funds in custody have been added to the PSA.

Under the existing provisions of the PSA, there have not been express provisions that restrict fund transfer service providers from keeping customer funds in custody, and some fund transfer service providers have in fact been holding some level of funds that belong to the customer[16]. As a general matter, it is prohibited by statute to engage in a business that accepts deposits of funds from a number of unspecified persons[17], but there has historically been some uncertainty regarding whether the practice of fund transfer service providers may be deemed as engaging in deposit-taking business, or if the practices would be considered only merely incidental to the fund transfer services, in which case there would be no violation of the prohibition.

Article 51 of the amended PSA clarifies that a fund transfer service provider (regardless of the class of the fund transfer business it engages in) is required to implement methods to avoid holding user’s funds that are not expected to be used for fund transfer transactions. The details regarding such required methods have been delegated to the FSA regulations to be amended.

With respect to Type I and Type III Fund Transfer Businesses, two additional provisions specifically addressing the restrictions on holding customer funds have also been added to the PSA by the Amendment.

Concerning Type I, the amended PSA prohibits fund transfer service providers from owing to users (i) liabilities or duties with respect to fund remittance(s) for which the amount(s), date(s), or other particulars to be prescribed by the amended FSA remain currently uncertain or unknown, and (ii) liabilities or duties related to fund remittance that remain outstanding for a duration in excess of the period necessary for processing such fund remittance or other periods to be prescribed by the amended FSA regulations[18]. Because there is no maximum amount per remittance imposed on Type I, failure to complete the transaction will have a greater impact on the users and the settlement system, and therefore stricter regulations on the scope of permissible liabilities and duties owed by the fund transfer service provider to the user were considered necessary in the Report.

Concerning Type III, the amended PSA prohibits the fund transfer service provider from owing certain liabilities or duties to each user exceeding a certain threshold amount to be prescribed by the amended Cabinet Order[19]. These liabilities will likely include funds received by the fund transfer service provider on behalf of the user for incoming Type III remittance and not yet delivered to the user, as well as liabilities for outgoing Type III remittance at the request of the same user. If this is the case, as a practical matter, it will become necessary for the fund transfer service provider to implement a method or system to deliver the funds received for incoming remittance to the addressee without delay.

5. Existing fund transfer service providers registered under the current PSA will be deemed to be categorized under Type II, but they will also be required to file with the FSA some additional documents (which describe additional information to be required for the registration under the amended PSA) within a period to be prescribed by the amended FSA regulations. If the existing fund transfer service provider wishes to change or add new types of fund transfer businesses that would be categorized in a different category (e.g., to enter into Type I to deal with a remittance exceeding JPY 1 million), the fund transfer service provider will be required to file an application for the change in the registration and additional documents that are required for the registration under the relevant class(es).

Inclusion of Payment Receiving Agency Services for Individuals in Fund Transfer Business for Which Registration Under the PSA Is Required

Article 2-2 of the amended PSA sets forth that payment receiving agency services – under which an agent engages in the business of receiving a payment on behalf of an individual (except for payments received by the individual for a business operated by such individual) – will be deemed to be fund transfer services that require registration under the PSA if such agency services satisfy certain criteria to be prescribed by the amended PSA. Thus, entities engaged in similar businesses should be prepared to register or change their business methods and carefully watch the draft amendments to the FSA regulations, which will likely be published in early next year.

Amendments to Provisions Relating to Prepaid Payment Instruments in the PSA

At the same time, some important amendments have also been made to the section regulating the Prepaid Payment Instruments (“PPIs”) in the PSA.

1. Promulgation of additional rules of conduct have been delegated to the regulations of the FSA.

Article 13, Paragraph 3, which is added by the Amendment, requires that Issuers of the PPIs implement measures necessary to ensure protection of users and the sound and appropriate operations of the businesses related to the issuance of the PPIs, in accordance with the provisions prescribed in the regulations of the FSA. Thus, the issuers of PPIs should carefully watch the draft amendments to the relevant regulations which will likely be published in early next year. In particular, the Report suggests that certain rules relating to permitted conduct, maximum amounts, etc. would need to be implemented or imposed concerning the transfer of PPIs between users on smartphone platforms, etc., and it is likely that such regulations will be introduced by the amendment to the relevant regulations of the FSA.

2. Obligations to monitor and supervise performance by outside venders are newly imposed on issuers of the PPIs by the Amendment. Again, details of such requirements have been delegated to the regulations of the FSA.[20]

An issuer of the PPIs (either a registered third-party type issuer, or a self-issuance type issuer that has filed applicable notifications upon exceeding certain prescribed thresholds) shall notify the regulator with the matters outsourced, and the name and address of the outside vendor, if such issuer intends to outsource a part of PPI issuance operations.[21]


[1] The amendments to the PSA are contained in the same Bill that also contains amendments to the Act on Sales, Etc. of Financial Instruments, which introduce a new registration system for one-stop intermediary services concerning various financial products and services. See https://www.fsa.go.jp/common/diet/201/01/houritsuanriyuu.pdf and https://www.mofo.com/resources/insights/200702-japan-one-stop-financial-services-intermediary-business.html.  

[2] See https://www.fsa.go.jp/singi/singi_kinyu/tosin/20191220/houkoku.pdf.

[3] See https://www.mofo.com/resources/insights/200220-japanese-fintech-regulations.html.

[4] The Amendments were published on the Official Gazette on June 12, 2020.

[5] Article 36-2, Paragraph 1 of the amended PSA.

[6] Article 37 and Article 38, Paragraph 1 of the amended PSA.

[7] Article 40-2, Paragraph 1 of the amended PSA.

[8] The draft amendments to the Cabinet Order will be published a couple of months prior to the effective date of the Amendment, together with the draft amendments to the FSA regulations.

[9] Article 36-2, Paragraph 2 of the amended PSA.

[10] Article 36-2, Paragraph 3 of the amended PSA.

[11] Under the current FSA regulations, (a) if the amount of the outstanding liabilities is JPY 100 million or less, 5% of the outstanding liabilities, or (b) if the amount of the outstanding liabilities is more than JPY 100 million, JPY 5 million plus 1% of the excess of the outstanding liabilities over JPY 100 million. Article 11, Paragraph 5 of the Cabinet Office Ordinance on Funds Transfer Service Providers (Cabinet Office Ordinance No. 4 of March 1, 2010; the “FSA regulations”).

[12] Article 43, Paragraph 1, Item 1 of the amended PSA.

[13] An administrative agency under the Ministry of Justice.

[14] Article 43, Paragraph 1, Item 2 of the amended PSA.

[15] Article 45-2 of the amended PSA. Details are delegated to the FSA regulations, which need to be amended prior to the effective date of the Amendment.

[16] Such funds may be (1) funds received from the customer in advance of making the remittance(s) or (2) funds received from a third party or third parties as a remittance or remittances addressed to the customer that have not been delivered to the customer.

[17] Article 2 of the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates (Act No. 195 of 1954). In order to engage in such business, it is necessary to obtain a license as a deposit-taking financial institution, such as a bank.

[18] Article 51-2 of the amended PSA.

[19] Article 51-3 of the amended PSA.

[20] Article 21-2 of the amended PSA.

[21] Article 5, Paragraph 1, Item 9 (for self-issuance type) and Article 8, Paragraph 1, Item 8 (for third-party type) of the amended PSA.

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