Provisional translation of the original Japanese version

 

Sumitomo Mitsui Banking Corporation

 

 

Sumitomo Mitsui Banking Corporation Issued Administrative Orders
By the Financial Services Agency

 

 

Tokyo, April 27, 2006 --- Sumitomo Mitsui Banking Corporation (SMBC; President: Masayuki Oku) announced today that it was issued administrative orders (Business Suspension Order and Business Improvement Order) in respect to the manner in which it marketed interest rate swaps at its Corporate Business Offices, by the Financial Services Agency of Japan (FSA), pursuant to Article 26 (1) of the Banking Law. We deeply regret this situation and sincerely apologize for causing concern to our customers and other stakeholders.

 

Specifics of the administrative orders are described below. We are responding to the administrative actions of the FSA with profound gravity, and will strictly enforce compliance measures, review Corporate Business Offices’ framework for marketing interest rate swaps, and take other measures to prevent reoccurrence.  At the same time, we will make every effort to regain the trust of our customers, SMFG (Sumitomo Mitsui Financial Group, Inc., holding company of SMBC) shareholders and the public.

 

 

1.      Description of, and Reasons for, the Administrative Orders

(1)   Description of the Administrative Orders

A. Business Suspension Order

1)      Corporate Business Offices must be are suspended from engaging in marketing (including making proposals and soliciting business) of interest rate derivatives (including embedded products) from May 15, 2006 (Monday) to November 14, 2006 (Tuesday) (excluding cases of manifestation of rational and voluntary intention to purchase such products by existing customers and if recognized as such in an objective manner).

2)      A Corporate Business Office must will not be newly opened from May 15, 2006 (Monday) to May 14, 2007 (Monday).

B. Business Improvement Order

1)      SMBC is required to establish a business administration framework, an internal control framework and a compliance framework from the following perspectives to ensure proper marketing of financial products as a bank and realize a customer-centric business framework.

a.         To clarify management stance on establishing a customer-centric business framework and a compliance framework

b.         To establish a framework for Corporate Business Offices to properly explain matters to customers and measures for its strict observance (including measures for establishing a framework for head-office supervision and administration)

c.         To establish a compliance framework by strengthening the mutual checking function of each Corporate Business Office (including a review of the “autonomy function” of self-responsibility which is a part of the basic structure of SMBC’s compliance system)

d.         To improve process of establishing business plans and business promotion guidelines to ensure a customer-centric business framework, and proper business administration and management in accordance with laws and regulations

e.         To review the head office’s framework and methods for auditing Corporate Business Offices and the head office, and strictly and thoroughly execute audits, and implement and strengthen follow-ups thereafter, in order to ensure a customer-centric business framework, and proper business administration and management in accordance with laws and regulations

f.          To establish a framework for providing customers with an explanation on explaining individual cases of violation to customers , including responding to complaints and inquiries (including responding to customers who were subjected to the abuse)

g.         To take proper measures to ensure the appropriateness of financial transactions and marketing of financial products and services in accordance with the “ Request of Efforts by Financial Institutions to Ensure Appropriateness of their Transactions Torihiki-tono-tekisetsu-kakuho-eno-torikumini-tsuite ” (measures to secure proper transactions) issued by the FSA on January 5, 2006

h.         To ensure establishment of the above frameworks through the administrative function of the holding company

i.           To establish a compliance framework that secures the head office’s objectivity while strengthening its mutual checking function

2)      SMBC is required to clearly specify the executives and employees  responsible for causing the problems that led to the business suspension order and business improvement order (including the clarification of responsibilities when the violations occurred)

3)      SMBC is required to submit a business improvement plan with respect to 1) and 2) above by June 2, 2006 (Friday) and implement it immediately

4)      After implementing 3) above, SMBC is required to summarize the progress, implementation and improvement status of the business improvement plan on a quarterly basis and report it to the FSA no later than the fifteenth day of the following month until the plan is carried out to the end, with the first reporting date to be August 31, 2006

 

(2)   The Law on which the Administrative Orders are Based

Article 26 (1) of the Banking Law

 

(3)   Reasons for the Administrative Orders

A.  SMBC was issued a cease and desist order from the Fair Trade Commission of Japan (“JFTC”) for violation of Section 19 of the Antimonopoly Act (Abuse of Dominant Bargaining Position) on four occasions with respect to marketing of interest rate swaps during the years from 2002 to 2004.

B.  An internal investigation by SMBC confirmed to no small extent cases of abuse of    dominant bargaining position (including questionable cases) in marketing of products centered on interest rate swaps from fiscal 2001 to fiscal 2004, in addition to the cases cited by the JFTC. Further, there were numerous questionable cases of fulfillment of legal responsibilities, including “Duty of Financial Product Provider, etc. to Explain” under the Law on Sales of Financial Products.

The investigation found that while constantly focusing on profits, business administration, internal control, and compliance frameworks were inadequate from the perspective of ensuring proper transactions, etc., and the violations were caused by the following major problems. Further, the investigation concluded that it would take a considerable time to bring about major improvements, including a mindset reform.

a.       With respect to the business plan established annually by the head office, Corporate Business Offices were assigned profit targets without sufficient analyses of local circumstances and past performances. Corporate Business Offices were inclined to market interest rate swaps to achieve the targets.

b.       The head office’s supervision of the Corporate Business Offices were centered on monitoring their progress in achieving their targets, and amid a situation of gross banking profit increasing in the term-end month, the head office failed to sufficiently control excessive promotion of interest rate swaps , of which revenues are recognized up-front.

c.       Sufficient consideration was not given to preventing abuse of dominant bargaining position when establishing interest rate swap marketing rules.

d.       There was insufficient checking of business plan and business promotion by each Corporate Business Office in terms of “autonomy function” under self-responsibility of the compliance system.

e.       The head office did not sufficiently perform its monitoring function, such as analyzing complaints.

f.        Auditing of Corporate Business Offices did not include sufficient examination of interest rate swap marketing situation, nor did auditing of the head office include prevention of abuse of dominant marketing position.

C.  SMBC failed to take effective measures to comply with the Antimonopoly Act, even though the JFTC and FSA had been sounding warning bells as the financial industry’s circumstances changed.

 

2.      Summary of Internal Investigation Conducted by a Special Internal Investigation Committee of SMBC

Last December, SMBC was issued a cease and desist order by the JFTC pursuant to the Antimonopoly Act with respect to cases of abuse of dominant bargaining position by certain Corporate Business Offices in marketing interest rate swaps.

In response, SMBC decided to conduct self inspection and established a special investigation committee which included a third-party, a lawyer who ha s d not entered into an advisory agreement with SMBC, and conducted a rigorous investigation of the situation last December.

The results of the investigation are outlined in the attached report.

 

 

3.      Measures to Prevent Reoccurrence

In order to prevent reoccurrence and thoroughly reinforce customer-centric and compliance in our minds, SMBC will establish a business improvement plan to greatly revise the frameworks for business promotion, business administration, etc. Specifically, measures will be implemented to prevent reoccurrence from the following perspectives.

(1)   Strengthen Compliance with the Antimonopoly Act

1)        Review compliance rules related to the Act

2)        Clarify compliance points of head office’s policies related to the Act

3)        Implement monitoring of compliance status with the Act with respect to business activities

(2)   Review Interest Rate Swap Marketing Framework of Corporate Business Offices

1)       Strictly select customers to whom interest rate swaps may be marketed

2)       Establish a framework for securing contracts based on customer’s voluntary intention

3)       Greatly revise proposal format

(3)   Establish Customer-Centric Business Framework

1)       Greatly revise the basic purposes of Corporate Business Offices from the customers’ viewpoint

2)       Fundamentally revise the rules on evaluating and awarding Corporate Business Offices for their performances

3)       Establish rules on product planning with due consideration given to customer protection

4)       Establish a Q q uality M m anagement Dept. department to which customers’ opinions will be concentrated and analyzed by the department in order to reflect their opinions in management

 

4.      Response to Customers’ Inquiries, etc.

Customers who have entered into interest rate swap contracts and have made inquires or demands with respect to their contracts will be given explanation individually of the results of the investigation by the special internal investigation committee and taken care of.

SMBC will respond earnestly and sincerely to customer inquires or demands, and the head office, not just the Corporate Business Offices, will be actively involved in properly answering inquires or demands, even from legal perspective.

 

5.      Clarification of Responsibility

Various problems with the head office, not just with the Corporate Business Offices, were confirmed with respect to this situation, and the management recognizes the need for an earnest self-examination. Therefore, the executives and employees responsible for causing the problems that led to the business suspension order and the business improvement order will be clearly specified and strict internal actions will be taken against them. The results of such actions will be published separately after the establishment of the business improvement plan pursuant to the business improvement order.