Provisional translation of the original Japanese version

 

April 27, 2006

Sumitomo Mitsui Banking Corporation

Special Investigation Committee

 

 

Self Investigation Report on Abuse of Dominant Bargaining Position

in Connection with Sale of Interest Rate Swap

 

 

1.         About the Report

 

On December 2, 2005, Sumitomo Mitsui Banking Corporation (SMBC) was issued a recommendation by the Fair Trade Commission of Japan (“JFTC”) based on several violations of Section 19 of the Antimonopoly Act (“Act”), particularly “Abuse of Dominant Bargaining Position” of Unfair Trade Practices, with respect to the manner in which it marketed interest rate swaps to its corporate clients. This issuance of the recommendation is pursuant to Section 48 (1) of the Act.

 

Based on this recommendation, we established the Special Investigation Committee (“Committee”) on December 14, 2005 in order to inspect whether there were any other cases similar to those JFTC pointed out and the factors of the incidents. This report summarizes the investigation led by the Committee.

 

2.         ２． About the Committee and Summary of the Investigation

 

(1)About the Committee
The Committee consists of five committee members headed by the Senior Executive Officer in charge of compliance in SMBC, three officers of SMBC and one outside r ( lawyer ) . Under the Committee, we set up a subcommittee, which consists of six lawyers, including the above-mentioned outsider one outside layer , and some SMBC’s officers who belong to Antimonopoly Monitoring Office, a segregated office from business promotion division of SMBC. There are no advisory contracts between these six lawyers and SMBC.

 

(2)Scope of Investigation

The Committee investigated the following:

a) Individual cases: judgment on abuse of dominant bargaining position as to every   

interest rate swap agreement which SMBC signed after April 2001.

b)Organizational factors that caused this incident.

 

(3)Way of Investigation on Individual Cases

a) The total number of the clients who had interest rate swap agreements with SMBC during the abovementioned period turned out to be 18,162 including who ha s d already terminated the agreements. First, we sent mails to all the clients out of 18,162 except who had already contacted us before this investigation. These mails were enclosed with questionnaire asking how they felt or recognized the abuse of dominant bargaining position by SMBC’s staff upon marketing of interest rate swaps to them, and also asking for response in case they regarded the way of our promotion as questionable.

 

b) Second, we have investigated 2,200 cases out of 18,162, where the clients made response or separately requested us to do so by other measures including  phone calls. Specifically, i) the investigation staff of the subcommittee interviewed the related marketing staff and inspected the related documents according with the guidelines set through consultation with the lawyers. ii) The lawyers in the subcommittee conducted preliminary judgment on whether there existed any abuse of dominant bargaining position based on the reports by the investigation staff. iii) The Committee conducted the final judgment based on the result of the preliminary judgment by the subcommittee.

 

(4) Investigation on Organizational Factors

Regarding organizational factors which brought about the these incidents, the Committee conducted investigation by asking the related departments in the head office s to submit reports and related documents and interviewing the related directors and executive officers including heads of the related business promotion divisions.

 

3.         ３． Outcomes of the Investigation  - Individual Cases -

 

(1)   The total number of investigation of the abuse of dominant bargaining position by the Committee is as follows:

 

Total number of applicable clients:                                     18,162

        Investigated:                                                              2,200

          Based on response to the investigation:                                  1,523

          Based on requests by other measures including telephone calls:          677

 

 

 

 

(2) The Outcomes of Final Judgments by the Committee:（*）

Cases of Abuse of Dominant Bargaining Position:                              17

Questionable Case s of Possible Abuse of Dominant Bargaining Position:              51 

Total                                 68

（*）Definition:

-  Cases of Abuse of Dominant Bargaining Position:

Where it is highly likely to be designated as abuse of dominant bargaining position in the case of litigation.

 

-          Questionable Case s of Possible Abuse of Dominant Bargaining Position:

Where there is a concern of abuse of dominant bargaining position and also a concern of designation as the abuse of dominant bargaining position by the judge in the case of litigation.

 

Besides, as a result of classifying cases with a conservative stance , there were 181 clients categorized into “ T he C ase s of Possible L egal Liabilities ” ( t he c ases r equiring f ur ther i nvestigation due to possible violation of any laws or regulations such as breach of duties to make sufficient explanation to the client ) that are not “The Cases of Abuse of Dominant Bargaining Position” or “The Cases of Possible Abuse of Dominant Bargaining Position .”

 

where n o abuse of dominant bargaining position nor concern of it was found while further investigation deemed necessary as there might be some legal concern on the insufficient explanation to the clients .

 

(3) Interest rate swaps are marketed by several divisions and units of SMBC; however, the Committee found the above determined and questionable cases only in the Middle Market Banking Unit, which is doing business with mainly small and medium sized enterprises.

 

4.      ４． Outcomes of Investigation - Organizational Factor -

 

(1) Through the investigation, the Committee found the several organizational behaviors to be improved in connection with interest rate swaps marketing as follows:

 

a)      In Middle Market Banking Unit, the profit targets have been set through discussion between Corporate Business Offices and Planning Department in head office. However, head office failed to analyze the performances and the process of obtaining such earnings in detail, and has been inclined to set the profit targets automatically based on the previous results with the assumption of certain rate of growth.

In addition, some Corporate Business Offices were assigned relatively high target by the head office without sufficient analysis of the local circumstances.

As a result of such budget assignment process, mainly in the Middle Market Banking Unit that provides banking services with small and medium sized enterprises, some Corporate Business Offices urged interest rate swaps marketing because the demand of borrowings had been decreasing while revenues from interest rate swap were recognized up-front according to the mark-to-market accounting principle. Furthermore, some offices conducted extravagant marketing and abused dominant bargaining position.

 

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 analyze the profit and actual business promotion in details. In addition, the weight of earnings in single fiscal year in evaluation system was relatively heavier than that of mid-long term targets including growth of customer base, and the Committee considered this as one of the organizational factors behind the incidents.

 

c)Although SMBC had established interest rate swap marketing rules from the compliance point of view, the rules had mainly focused on the structural explanation of the swaps as derivative products without enough consideration of characteristics of the clients including the size and profitability. Thus, the rules could not work effectively to prevent from the abuse of dominant bargaining position.

 

d)The prevention from the abuse of dominant bargaining position had been stipulated indeed. However, the rule had failed to define the repeated canvass accompanied by senior officers as “ hinting implying ”, and had not worked effectively to prevent from such hinting implying practices. This failure was also pointed out in the recommendation by JFTC. SMBC had also established the compliance system based on the self-discipline principle where each unit/office, with the support of head office, is individually responsible for the compliance.  In this system, the compliance officer in the each office is not completely independent from the business promotion line and the consideration for compliance was insufficient in the business budget/plan and the business promotion. The Committee attributes the incident also to these factors.

 

e)The Committee also found that the framework to respond to customer complaints control system had not worked effectively because it focused on dealing with individual cases and not on improving the product itself and the monitoring system of interest rate swap marketing. In addition, there was a problem that the analysis of Customer Satisfaction Survey was insufficient in the Middle Market Banking Unit.  

 

f)  In the internal audit of towards Corporate Business Offices regarding interest rate swap marketing, the Internal Audit Department had not conducted sufficient audit on the actual marketing by the office from antimonopoly point of view. Also, the audit of towards the head office had not worked effectively as it did not include prevention of abuse of dominant bargaining position.

 

g)   Each related department in SMBC had respectively responded to the revision of the Guideline for Supervision by FSA and “the Report of Survey of Trade Practices between Banks and Firms, from the Viewpoint of Prevention of the Unfair Trade Practices on July 2001” by JFTC; but SMBC had not coped with them more in details to improve the business promotion system as a whole.

 

(2) In summarizing the investigation by the Committee, there were problems in the Head Office and Corporate Business Offices respectively in connection with   interest rate swap marketing and the compounded factors of these problems brought about the incident. In other words, we had set the challenging budgets and promoted them, while we had failed to establish an effective the equivalent and enough internal control, checking and balancing system.    

 

(3)SMBC professes “Customer-Centric” in our Corporate Business Mission and mentions it in the Compliance Manual. However, considering the background of the incident, it is envisaged that the staff in the head office and Corporate Business Offices who engaged in promotion of interest rate swap had not thoroughly understood and kept in mind the “Customer- Centric” Concept.

 

End.