Suitability and the Duty to Explain

These duties apply to banks and securities firms when they solicit clients for derivatives transactions and explain them before the contract. Compliance also refers to them when it checks solicitation practices and explanation arrangements.

What these rules require

The suitability principle requires that a financial institution not solicit clients in an inappropriate way, in light of the client's knowledge, experience, financial situation, and purpose in entering the contract. The duty to explain requires that, before the contract, the institution explain matters such as the risk of loss in a way and to a depth the client can understand. The first decides whom you may solicit and how. The second decides what you must explain and how far. Work such as providing and explaining a document before the contract, setting a solicitation policy, and managing the status of clients' requests to be solicited rests on these rules.

For OTC derivative transactions, the FIEA has special rules on what the pre-contract information document must contain. The Financial Services Provision Act lists them in its provisions as a subject of the duty to explain¹. The steps for checking and recording client information in the field are covered in Suitability Checks.

Legal basis and authorities

Legal duties, the authorities' views, and self-regulatory rules differ in nature, so the table below keeps them apart.

The Prime Minister holds the power to enforce the FIEA's duties (see the section on effects). The Prime Minister delegates the powers under that Act, except those set by Cabinet Order, to the Commissioner of the Financial Services Agency³. The supervisory guidelines are a document that lists the points the FSA looks at when supervising financial institutions, and they are separate from the articles of law⁴.

The amendments listed on e-Gov that have not yet taken effect (up to those taking effect on June 13, 2028) do not change the wording of the following provisions⁵. These are the suitability principle, the pre-contract provision of information, the prohibited acts, and the exemption for professional investors. They also include the Financial Services Provision Act provisions from the duty to explain to the solicitation policy.

The latest version in force of each law took effect on the following dates.

The articles of law were checked in the versions published as of October 3, 2026 (effective dates in the table above).

Who is covered, and which clients

The FIEA's suitability principle, pre-contract provision of information, and prohibited acts apply to financial instruments business operators, etc. That term covers financial instruments business operators and registered financial institutions together⁶. A registered financial institution is a bank, cooperative financial institution, or other financial institution specified by Cabinet Order that has registered⁷. A financial institution registers with the Prime Minister when it intends to carry out certain acts as a business, such as brokerage by document (our translation) and derivatives transactions⁸.

The duty to explain and the prohibition of giving a conclusive judgment under the Financial Services Provision Act apply to financial instruments sellers, etc., meaning persons that carry out the sale of financial instruments as a business. The sale of financial instruments includes OTC derivatives transactions, market derivatives transactions, and brokerage of them⁹. For banks, the Banking Act also has a provision that sets measures for explanation that take into account the client's knowledge, experience, financial situation, and purpose of the transaction, and it prohibits acts such as telling falsehoods and giving a conclusive judgment. The FSA's supervisory guidelines for major banks list not violating the Banking Act's prohibitions, the FIEA's prohibited acts, or the suitability principle as a point of focus for loan transactions that include derivatives¹⁰.

Whether the client is an individual or a corporation does not change how the suitability principle and the pre-contract explanation provisions apply. What the articles of law distinguish is whether the client is a professional investor or another client. Professional investors are qualified institutional investors, the State, the Bank of Japan, the Investor Protection Fund, and other corporations specified by Cabinet Office Order¹¹.

Two questions sort out when these two FIEA provisions apply.

Figure description

The figure checks, through two questions in order, whether the suitability principle and pre-contract provision of information and explanation apply. Failing either means they do not apply, and passing both means they do. The result does not depend on whether the customer is an individual or a corporation.

The table below shows how each provision treats a professional investor.

Neither of the two provisions that prohibit giving a conclusive judgment excludes professional investors. The Financial Services Provision Act's explanation of important matters does not apply when the counterparty is a specified client, meaning a financial instruments seller, etc. or a professional investor under the FIEA¹². The FIEA has a proviso that removes this exemption in cases that a Cabinet Office Order sets for the sake of the public interest or the protection of professional investors. The Business Order sets cases such as the provisions on information at the time a contract is concluded and the document on receipt of margin. It does not reach the FIEA provisions in the table¹³.

Professional investors and other clients can sometimes switch treatment, contract type by contract type, through a request and consent¹⁴. How the classification works and its effects are covered in The Financial Instruments and Exchange Act and Derivatives.

What is required

The suitability principle

When the client is not a professional investor, a financial instruments business operator, etc. must conduct its business so that inappropriate solicitation does not leave, or risk leaving, investors inadequately protected¹⁵. What is inappropriate is judged in light of the client's knowledge, experience, financial situation, and purpose in entering the contract. The article does not name individual solicitations and prohibit them. It asks about the state of business operations.

The article does not list what counts as inappropriate. The next section sets out the FSA's view.

Points of focus in the supervisory guidelines on suitability

The following are points of focus that the FSA lists in its supervisory guidelines for financial instruments business operators (October 2026 edition). They are not duties in the articles of law¹⁶.

• The operator understands the content of the products it offers.
• The operator understands the client's attributes and the reality of the client's trading.
• Before soliciting, the operator has considered the reasonable grounds on which the product suits the client's attributes and investment purpose.
• There is no inappropriate or insincere solicitation, such as solicitation that makes a client bear excessive fees through frequent trading.
• The internal control function checks these points.

When soliciting individual clients for complex structured bonds or investment trusts similar to OTC derivatives transactions, further points apply. They are whether the operator checks product suitability in advance based on the JSDA rules (suitability based on reasonable grounds), and whether it has criteria for starting solicitation that depend on the product and the client¹⁷.

Provision of information and explanation before the contract

The document handed to the client before the contract is the pre-contract document. The duties before the contract split into the following three: the FIEA requires the provision of information and its explanation, and the Financial Services Provision Act requires the explanation of important matters¹⁸¹⁹.

The provision of information is not required in cases such as when information on the same type of contract was provided within one year before the contract. The matters to provide include those set by Cabinet Office Order. For OTC derivatives transactions, items such as matters concerning cover transactions are added²⁰.

Matters concerning the risk of loss are outside the FIEA explanation. The explanation itself is not required when the client has confirmed, by an appropriate method, that it understood the content from the provision of information alone, or when the client has expressed that it does not need an explanation (except for commodity-related market derivatives transactions and brokerage of them)²¹.

In the explanation under the Financial Services Provision Act, the risk of principal loss is the risk that the total money the client pays exceeds the total money it obtains. The risk of a loss exceeding the initial principal is the risk that the amount of the loss exceeds the margin or similar deposit the client must pay. The causes are written in two groups: changes in indicators such as interest rates, currency prices, and market quotations, and changes in the business or financial condition of the seller and others. This explanation is also not required when the client has expressed that it does not need one (except for commodity-related market derivatives transactions and brokerage of them)¹⁹.

Prohibited ways of soliciting

The following acts are mainly prohibited as ways of soliciting²².

The Order for Enforcement of the FIEA divides the contracts covered by the prohibition of unsolicited solicitation into two. One is over-the-counter financial futures transactions (which cover currencies and similar underlyings) and crypto-asset-related OTC derivatives transactions; both are covered even when the client is a corporation. The other is other OTC derivatives transactions, which are covered only when the counterparty is an individual client²³. The duty to confirm willingness before soliciting and the prohibition of re-solicitation cover these contracts plus others, such as brokerage of market derivatives transactions.

The Business Order sets exceptions to the prohibition of unsolicited solicitation. The main ones are the following two²⁴.

• Solicitation of clients with an ongoing business relationship. These are clients with two or more contracts of the same type in the year before the day of solicitation, and clients with an open position on that day.
• Solicitation of corporations engaged in foreign trade or other foreign exchange transactions, for the purpose of reducing the possible loss from exchange rate movements.

Consider a hypothetical example in which Bank O solicits three clients in turn, none of whom has asked to be solicited, and to none of whom an exception to the prohibition of unsolicited solicitation applies.

Bank O calls an individual client to solicit an OTC derivatives transaction that is neither an over-the-counter financial futures transaction nor a crypto-asset-related OTC derivatives transaction. This is an OTC derivatives transaction other than those two, with an individual client as counterparty, solicited by a call, so it falls under the prohibition of unsolicited solicitation. Unless the client is a professional investor, the suitability principle also applies.

Bank O calls Company P, a corporation (not a professional investor), to solicit the same OTC derivatives transaction. With a corporation as counterparty, this contract is not covered by the prohibition of unsolicited solicitation. The suitability principle still applies, because Company P is not a professional investor. The prohibitions on telling falsehoods and on giving a conclusive judgment are not limited by contract or client. The prohibition of unsolicited solicitation not covering the call does not mean that soliciting by call is permitted.

Bank O solicits another corporation that is a qualified institutional investor and has not applied to be treated as a client other than a professional investor. The counterparty is a professional investor, so the suitability principle and the pre-contract provision of information and explanation do not apply. The prohibition of giving a conclusive judgment applies.

Ensuring proper solicitation, and the solicitation policy

A financial instruments seller, etc. must endeavor to ensure proper solicitation. When it intends to solicit sales of financial instruments as a business, it must set a solicitation policy in advance and publish it promptly. The State, local governments, and others specified by Cabinet Order, and those whose only clients are specified clients, do not need a policy. The policy sets out the matters to consider in light of the knowledge, experience, financial situation, and purpose of the contract of the people solicited, the matters to consider regarding the method and time of solicitation, and other matters on ensuring proper solicitation²⁵.

Effects of breaching the duties

The FIEA has administrative dispositions for each type of operator. Against a financial instruments business operator, the Prime Minister can order measures needed for improvement, such as a change in business methods, when the Prime Minister finds it necessary and appropriate for the public interest or investor protection (a business improvement order). When the operator violates laws and regulations, among other things, the Prime Minister can order revocation of registration or suspension of business for up to 6 months. Registered financial institutions are also subject to the same kind of business improvement order and to provisions on revocation of registration and suspension of business²⁶.

The supervisory guidelines for financial instruments business operators (October 2026 edition) state that the FSA identifies problems in arrangements concerning the suitability principle and similar matters through its day-to-day supervision, and uses hearings and reports required under the FIEA to check the operator's voluntary improvement efforts. They state that when it judges that there is a serious problem in light of the public interest or investor protection, it takes steps such as issuing a business improvement order. They also state that when there is a serious and malicious violation of laws and regulations, it considers its response, including issuing a business suspension order²⁷.

Only some of the FIEA duties carry criminal penalties. Failing to provide the pre-contract information or providing false information is punishable by imprisonment for up to 6 months or a fine of up to 500,000 yen, or both. Telling the client falsehoods in connection with concluding or soliciting a contract is punishable by imprisonment for up to 1 year or a fine of up to 3 million yen, or both. By contrast, violations of the suitability principle, the prohibition of giving a conclusive judgment, and the prohibition of unsolicited solicitation and similar acts are not listed in the FIEA's penalty provisions. Their effects are administrative dispositions and, for giving a conclusive judgment, liability for damages under the Financial Services Provision Act²⁸.

The Financial Services Provision Act sets civil liability. A financial instruments seller, etc. that fails to explain an important matter it must explain, or that gives a conclusive judgment or similar, is liable to compensate the client for the resulting damage. When the client claims compensation, the amount of the principal loss is presumed to be the amount of the damage. Besides this Act, the provisions of the Civil Code also apply to liability for damages²⁹.

Practical implications

For explaining derivatives transactions such as options and swaps, the supervisory guidelines for banks and for financial instruments business operators, etc. list the following as points of focus³⁰³¹.

• The maximum expected loss in a worst-case scenario based on data from past periods of stress and similar
• The amount of loss the client can tolerate
• Early termination and the termination payment
• For a hedging trade, that it functions as an effective means of hedging
• That a written acknowledgment that the client received the explanation is obtained from the client and kept

The guidelines for banks also look at whether the bank has set its explanation arrangements in internal rules according to the client's knowledge and experience, and whether they fit the reality, especially for small and medium-sized companies and individuals³¹.

The Principles for Customer-Oriented Business Conduct are not law. They are a framework in which the FSA sets out principles and financial business operators adopt them and act on them³².

Sincere and fair business that takes the client's best interest into account is set as a legal duty by the Financial Services Provision Act³³.

Notes

1. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 3, paragraph 1, items 8 and 9 (market derivatives transactions and OTC derivatives transactions, including brokerage), and "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 94 (special rules on the contents of the pre-contract document for OTC derivatives transaction contracts). ↩

2. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), IV-3-3-2(3) (page 163) and (10)② (page 169) (in Japanese). ↩ ↩²

3. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 194-7, paragraph 1. ↩

4. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), III-2-3-2-1 "適合性原則" (Suitability principle), (1) "主な着眼点" (Main points of focus) and (2) "監督手法・対応" (Supervisory methods and responses) (pages 52–54) (in Japanese). ↩

5. e-Gov Laws and Regulations Search, "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation) as of June 14, 2028, and "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese) reflecting amendments up to October 1, 2027. ↩

6. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 34 (defined as "金融商品取引業者又は登録金融機関をいう。" (a financial instruments business operator or a registered financial institution; our translation)). ↩

7. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 2, paragraph 11 (definition of a registered financial institution) and Article 33-2 (registration). ↩

8. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 33-2, paragraph 1, items 1 and 3. ↩

9. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 3, paragraph 1, items 8 and 9, and paragraphs 2 and 3. ↩

10. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-3-3-1-1(1) (page 215; Banking Act Article 12-2, paragraph 2, Article 13-7 of the Ordinance for Enforcement of the Banking Act, and Banking Act Article 13-3) and III-3-3-1-2(2)①イ (page 217; not violating Banking Act Article 13-3 or FIEA Articles 38 and 40) (in Japanese). ↩

11. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 2, paragraph 31. ↩

12. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 4, paragraph 7, item 1, and Article 12, paragraph 1 of the "金融サービスの提供及び利用環境の整備等に関する法律施行令" (Order for Enforcement of the Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese) (specified clients). The FIEA exemptions are in "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 45, item 1 (Article 37, Article 38, items 4 to 6, and Article 40, item 1) and item 2 (Articles 37-2 to 37-6, etc.). ↩

13. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), proviso to Article 45, and "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 156 (sets the application of Articles 37-4, 37-5, 41-4, 42-5, and 42-7). ↩

14. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 34-2 (from professional investor to other client), Article 34-3 (from a corporation that is not a professional investor to a professional investor), and Article 34-4 (from an individual who is not a professional investor to a professional investor). ↩

15. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 40, main clause and item 1. ↩

16. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), III-2-3-2-1 "適合性原則" (Suitability principle), the introduction and (1)①–⑤ (pages 51–53) (in Japanese). ↩

17. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), IV-3-3-2(11)①② (page 169) (in Japanese). ↩

18. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-3, paragraph 1 (provision of information) and paragraph 2 (explanation). ↩

19. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 4, paragraph 1 (items 1 to 7), paragraphs 2 and 3, paragraph 4, items 1 and 2, and paragraph 7, item 2. ↩ ↩²

20. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-3, paragraph 1, items; "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 79, paragraph 1 (delivery of documents and electronic means), Article 80, item 1 (information on a contract of the same kind provided within one year before the contract), Article 82, and Article 94, paragraph 1 (special rules for OTC derivatives transaction contracts). ↩

21. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-3, paragraph 2 (the parenthetical excludes paragraph 1, items 5 and 6), and "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 96-2, paragraph 1 (excluding the matters in Article 82, items 3 to 6) and paragraph 2, items 1 and 2. ↩

22. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 38, items 1, 2, and 4 to 6, and "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 5. ↩

23. "金融商品取引法施行令" (Order for Enforcement of the Financial Instruments and Exchange Act, in Japanese), Article 16-4, paragraph 1, item 1 (a to d) and item 2, and paragraph 2. "店頭金融先物取引" (over-the-counter financial futures transactions; our translation) means the transactions in Article 16-4, paragraph 1, item 1 (a to c) of that Order (Article 79, paragraph 5, item 2 of the "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese)). The Financial Services Agency's "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), IV-3-3-2(10) (page 168) (in Japanese), likewise limits the other transactions to individual clients. ↩

24. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 116, paragraph 1, items 1 and 2 (over-the-counter financial futures transactions), and items 4 and 5 (ongoing business relationship with an individual client). Item 5 limits the types of transactions. ↩

25. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Articles 9 and 10. ↩

26. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Articles 51 and 51-2, Article 52, paragraph 1, and Article 52-2, paragraph 1. ↩

27. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), III-2-3-2-1(2) "監督手法・対応" (Supervisory methods and responses) (pages 53–54) (in Japanese). Collection of reports is under Article 56-2, paragraph 1 of the FIEA, and business suspension orders are under Article 52, paragraph 1 of the Act. ↩

28. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 205, item 12 (Article 37-3, paragraph 1) and Article 198-6, item 2 (Article 38, item 1; excluding violations relating to investment management business). No penalty provision lists violations of Article 40 or of Article 38, item 2 or items 4 to 6, and the same is true of violations of Articles 4 and 5 of the Financial Services Provision Act (failing to set or publish the solicitation policy is subject to a non-penal fine under Article 154). ↩

29. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 6, Article 7, paragraph 1, and Article 8. ↩

30. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), IV-3-3-2(6)①–④ (pages 164–166) (in Japanese). ↩

31. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.), III-3-3-1-2(1)②ロ (page 216) and (2)①イ a, b, c, and d (pages 217–219) (in Japanese). ↩ ↩²

32. Financial Services Agency, "顧客本位の業務運営に関する原則" (Principles for Customer-Oriented Business Conduct) (September 26, 2024), pages 2–3, "本原則の対象" (Scope of these principles) and "本原則の採用するアプローチ" (The approach adopted by these principles) (pages 3–4 of the PDF) (in Japanese). ↩

33. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 2, paragraph 1 and paragraph 2, items 2 and 3, and Article 2-2, item 1 of the "金融サービスの提供及び利用環境の整備等に関する法律施行令" (Order for Enforcement of the Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese). ↩

34. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.), IV-3-3-2(10)①イ and ハ (pages 168–169) and (6)⑤ and its note (page 166) (in Japanese). The note's example: when a domestic construction company imports lumber from overseas and in practice does the importing and exporting through a domestic trading company, it falls within the scope of corporations; when it merely buys imported lumber from a domestic dealer, it does not. ↩