I. On June 5, 2020, the Diet of Japan adopted several amendments to the Payment Services Act (Act No. 59 of June 24, 2009) (the “PSA”). The amendments include reforms of the licensing/registration system for fund transfer service providers, the introduction of several categories of fund transfer services, and certain enhancements to regulations on issuers of prepaid payment instruments. For a summary of these statutory amendments, please see our client alert dated July 15, 2020. For the purposes of this article, it is expected that the reader has a general understanding of the current contents of the PSA.
On December 25, 2020, the Financial Services Agency of Japan (“FSA”) published draft amendments to the regulations, which enforce the PSA, and the related administrative guidelines for public comments. The drafts were closed for public comments as of January 25, 2021, and the final versions of the amendments will be published within a couple of months. While the amendments to the regulations have not been finalized, the draft published on December 25, 2020, contains the following amendments, most of which we assume will also be included in the final version, subject to any changes that may be made in response to public comments.
Major amendments with respect to fund transfer services are described below.
(1) When a payment receiving agency service will be deemed a fund transfer business
Article 2-2 of the amended PSA sets forth that a payment receiving agency service – a service under which an agent engages in the business of receiving a payment on behalf of an individual (except for payments received by an individual for a business operated by such individual) – will be deemed a fund transfer service that requires registration under the PSA if such agency service satisfies certain criteria prescribed by the amended regulations under the PSA. According to the draft amendment to the regulations, if any of the following apply, then a service will be treated as a fund transfer business:
(a) if the underlying payment obligation is not extinguished until the fund is actually received by the recipient individual or designee;
(b) if the underlying payment obligation is incurred by a loan or similar transaction; or
(c) if the service falls under both of the following:
(i) the service is not an escrow or similar service for payment to be rendered in exchange for the performance of some other obligation pursuant to an underlying contract; and
(ii) the service is not provided by a person who (x) provided services necessary under the underlying contract, (y) accepts, or causes to be accepted by some other person, the payment from the party obligated to make such monetary payment under the underlying contract, and (z) transfers the funds received as such payment with the consent of the recipient in accordance with the underlying contract.
The language of the provision is a bit complicated, but in essence it is intended to exclude payment settlement services that have an escrow or similar function related to consumer‑to‑consumer sales transactions that are conducted through a website (such as an auction site or a flea market site), if such payment services are made available by the operator of such website.
(2) Maximum amount per remittance that Type II and Type III fund transfer business operators may handle.
Maximum amounts are set, as expected, at JPY 1 million (and its equivalent in other currencies) for Type II, and JPY 50,000 (and its equivalent in other currencies) for Type III.
(3) Regulations related to liabilities that a registered fund transfer business operator (“Fund Transfer Business Operator” or “FTBO”) may have towards its users.
(a) An FTBO engaged in a Type I fund transfer business (“Type I FTBO,” in its capacity as the operator of the Type I fund transfer business) is prohibited from owing any liabilities (including by accepting funds to be used for future money remittances), in connection with its Type I fund transfer business, to any user unless all of the following information is clearly known to the Type I FTBO:
(i) the amount of the money remittance contemplated to be made with the funds received (“Contemplated Money Remittance”);
(ii) the date of the Contemplated Money Remittance; and
(iii) the recipient of the Contemplated Money Remittance.
In addition, Type I FTBOs are prohibited from owing any liabilities, in connection with their Type I fund transfer businesses, to any user for longer than the period of time necessary for processing the relevant money remittance (including the period necessary for resolving any issues not attributable to the Type I FTBO that prevent the completion of the money remittance, such as the failure of a user to designate the recipient correctly).
Thus, Type I FTBOs are generally restricted from (i) accepting funds from users in advance unless such funds will immediately be used for particular money remittance(s) and (ii) keeping incoming funds undelivered to recipient users.
(b) The maximum amount of outstanding liabilities that an FTBO may owe to an individual user with respect to a Type III fund transfer business (“Type III FTBO,” in its capacity as the operator of the Type III fund transfer business) in connection with its Type III fund transfer business is JPY 50,000. For the purpose of this calculation, the following are taken into account and count cumulatively towards the JPY 50,000 cap: (i) the amount that a user has deposited with the relevant Type III FTBO without designating recipients in preparation for future remittance, (ii) the amount of money remittance that has been received by the Type III FTBO for the user but that has not yet been delivered to the user, and (iii) the amount that has been received by the Type III FTBO from the user for remittance to a recipient, for which the Type III FTBO has not yet completed delivery to the recipient or the recipient’s agent. Thus, for example, if a Type III FTBO commences a money remittance for JPY 50,000 for a user, such Type III FTBO may not accept any other funds from or for the benefit of such user until the initial money remittance of JPY 50,000 has been completed.
(c) If an FTBO is engaged in a Type II fund transfer business (“Type II FTBO,” in its capacity as the operator of the Type II fund transfer business), such FTBO is required to implement rules, procedures, and systems to ensure that, if the amount of its liabilities owed in connection with its Type II fund transfer business to any single user exceeds JPY 1 million or its equivalent in other currencies, the Type II FTBO verifies whether such excess funds will be used for money remittances.
(d) To ensure that FTBOs only keep user funds that will be used for money remittances, FTBOs are required to take certain measures, which include returning funds not used for money remittances to users.
(e) If an FTBO enters into a guarantee contract with a financial institution in lieu of using cash deposits as security for users’ claims, such FTBO is required to implement rules, procedures, and systems so that the funds received from users will not be used for extending loans and other credits. The purpose of this requirement is to prevent FTBOs from engaging in business similar to that of a bank or other deposit-taking financial institution without the appropriate license.
(f) If an FTBO engages in more than one type of fund transfer business (which is possible by obtaining the appropriate registrations), such FTBO shall take measures to ensure that each user can easily ascertain which type of fund transfer business such user is engaging, and the amount of liabilities owed by the FTBO to such user for each type of fund transfer business. Also, such FTBO may not convert the liabilities owed by it to its users for its Type II fund transfer business to liabilities owed for its Type I fund transfer business.
(4) Provisions concerning the approval of business plans and related filings for Type I fund transfer businesses, which are required under the amended PSA of the Type I FTBO, were added.
(5) Provisions concerning security deposits and alternative measures were enhanced to reflect the introduction of fund transfer business classifications and to add some flexibility for FTBOs.
If an issuer of prepaid payment instruments (which include e-money, “PPIs”) issues PPIs, all or part of the outstanding amount of which is transferrable to a third party through an electronic data processing system or otherwise, the issuer shall implement appropriate measures to prevent inappropriate uses of such PPIs. Such measures may include implementing a system to monitor transfers and limiting the amount that may be transferred.
Some regulatory concerns have been raised that transferrable PPIs are used in lieu of money remittance services (which are subject to more stringent regulations than PPIs), and a government-sponsored working group proposed introducing restrictions. This amendment will require issuers to set maximum transfer amounts to ensure that users will not use the assignment of PPIs for the settlement of large amounts akin to money remittance services.
In addition, issuers shall, if necessary in light of their businesses and operational methods, implement appropriate measures to make policies concerning the indemnification of damages suffered by third parties (other than users of PPIs available to such third parties).
There have been incidents in which funds were automatically withdrawn from users’ bank accounts and charged to PPIs, and then such PPIs were used by unauthorized third parties. This provision will require the issuer of PPIs, which are chargeable by bank account withdrawals or credit card charges, to coordinate with banks and credit card networks to prevent such unauthorized uses of PPIs.
In addition, some amendments were made to provisions concerning security deposits and alternatives thereof to increase flexibility.
II. The effective date of the amendments to the Installment Sales Act, which were adopted by the Diet last year, will be April 1, 2021. The amendments introduce a new business category for small amount installment sales intermediary services, which is restricted to a maximum credit limit of JPY 100,000. Credit checks for prospective cardholders of these services are less stringent than those for services without such maximum credit limits. The amendments are intended to allow a broader group of consumers to hold credit cards as cashless payments are becoming more and more important in the market system.
Also, under the amendments, providers of QR code settlement infrastructures and other settlement infrastructures (such as operators of online malls that provide settlement functions) will be subject to data security regulations related to credit cards and other information.
 For an explanation of the different types of fund transfer business operators, see https://www.mofo.com/resources/insights/200715-reforms-japanese-regulations.pdf?#zoom=100.