Kozuka, Souichirou --- "Compliance tales" [2008] MonashBusRw 61; (2008) 4(3) Monash Business Review 8

Compliance tales

Souichirou Kozuka

Compliance is necessary, but public trust is vital says Souichirou Kozuka.

This article is an excerpt from a paper presented at the Monash Macquarie Financial Services conference held on 18 July 2008.

In the last few years, cheating by manufacturers has been a major concern among Japanese consumers. In January 2008, 17 out of 24 paper manufacturers in Japan admitted they had made false representations about the percentage of recycled paper used in their products. Then, six months after admitting it had advertised broiler chickens as natural ones, the famous Japanese restaurant in Osaka, Semba Kiccho confessed to repeatedly offering food left untouched by one customer to the next customer. More recently, packages of eel from China were found to have been passed off as Japanese eel.

It is no wonder compliance has attracted public attention. And there is no doubt that these kinds of fraud will be eradicated. However, if compliance means merely abiding by laws and regulations, it is nothing more than another name for the enforcement of regulations. In addressing this problem, the best mixture of public and private initiatives, civil and penal sanctions, as well as the hard-law and soft-law schemes may be the major issue.

Sometimes, however, compliance means more than merely complying with the law as was the case in Japan’s so-called ‘unjust’ non-payment in the insurance industry. Some insurance claims went unpaid because often the insured and the insurer didn’t even realise that a payable claim existed as it was not easy to read the complicated policies accurately. Initially reported in February 2005, most of the providers of insurance services were ordered by the Financial Services Agency to improve their operations.

As a result, the public became distrustful about insurance and this was reflected in the decline in sales of insurance products in both life and non-life insurance sectors.

The perception of fairness

The regulation of insider trading has long been an issue. While some commentators argue that allowing insider trading will make the capital market more efficient, regulators in major economies are not convinced and enforcement appears more stringent than before. This may better be understood when we take the element of ‘trust in the market’ into consideration. Insider trading, especially when the insider acquires a huge profit as a result, breeds distrust among investors. Recently in Japan, three employees of public broadcaster NHK were reported to have accessed news ahead of its broadcast and traded the stocks of the relevant company. It is more than certain that this harmed the public’s trust in the capital market, not only discrediting the reputation of the media corporation.

Regulation is not a panacea for all problems. Take, for example, the issue of sub-prime loans and the overly generous rating of security products. Even without such improper practices the problem could still have taken place, as strict rating does not remove risks but only makes them visible. If the major investment banks did not purchase sub-prime-related products, they might have been acquired by other investors.

In order for the market to function satisfactorily, the proper regulation is a necessary, but not sufficient, condition. It is necessary in the sense that it ensures, among others, the trust of the public in the market. This is the bottom line that we have to bear in mind when we discuss regulatory issues.

To view this paper in full, see www.mbr.monash.edu.au

Cite this article as

Kozuka, Souichirou. 'Compliance tales'. Monash Business Review. 2008.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 8–9. DOI:10.2104/mbr08061

About the author

Souichirou Kozuka

Professor of Law, Sophia University, Tokyo, Japan