The suitability rule in civil law principle

The Supreme Court Decision

The Supreme Court Decision on July 14^th 2005, in the case of the option trading disputes, does not indicate concerning what principle in civil law is infringed by the breach of the suitability rule. The ruling said that if the securities broker solicited positively particular securities transaction that is materially dangerous against the investment objective and the status of customer and therefore is not accordance with the requirement of the suitability rule apparently, such practices become illegal in tort law.Above word of “status” of a customer is not defined in detail. Provably, it might mean the financial status and/or risk tolerance of the customer.Concerning the considering whether the practices is against the requirement or not, it is necessary not only to take account of the abstract danger of financial products, but also  consider the actual risk of particular security in relation to the elements of the suitability rule: experience of investment, recognition and information of securities, investment objective and financial status. 

Sapporo District Court ruling

The ruling of the Sapporo District Court on April 12^th 2007, in the case of the commodity futures trading case, stated apparently that the breach of the suitability rule was against a good faith in civil law (sec.1).Moreover, the ruling stated the justification of the duty should be based on the existence of the qualitative difference on information, experience and capability between a customer and trader in the particular trading, in addition to the reliance for the trader by consumer and the privilege of a trader that is able to trade with a license. 

The relation to the Consumer Contract Law reform

The Japan Federation of Bar Associations demands to insert the provision of the suitability rule in a coming reform law as a principle on a civil rule.[1] 

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[1] http://www.consumer.go.jp/seisaku/shingikai/keiyaku2/file/shiryo4-3.pdf

The suitability rule in the commodity futures transaction

Disputes

Many usual consumers are lured to the commodity futures transaction by cold calling. For the respondent for the increase of disputes in nationwide, our government decided to stipulate the Opt-out rule in the provision (sec.215(1)(v)). In spite of the law reform, a number of disputed was reported even now. Only concerning the licensed future commodity brokers, The number of consultation to the consumer centre reached 2,427 in 2005 fiscal year. [1] 

The recent number of complaints can be found the NCAC’s website.[2]  The increasing is remarkable. 

The importance as a criterion of judgement of unfair practices  

Suitability rule as the criterion of illegality judgmentIn a decade, the number of court rulings that adapted the suitability rule as a criterion of fairness of the trading practices has been increasing significantly.  

Sapporo District Court decision 

For instance, the Sapporo District Court, April 12^th 2007, interpreted the requirements and circumstance stated  of the rule  in details.

The defendant was the licensed and registered commodity futures broker. The plaintiff, 58 years old at the trading started, was reemployed salaried worker who graduates a university and retired a financial institution. The claimant suffered a trading loss as JPY 17,076,200 for a half of year trading with the defendant. The invested and loss money was his retirement allowance and death benefit of his wife.

The goods of futures trading were petroleum and kerosene. The plaintiff claimed the defendant to pay damage compensation, because the trader’s solicitation and business activity was against a good faith and fair trading practices (sec.213).

In conclusion, the court approved the plaintiff claim in full and rejected the counterclaim of the defendant that the damage should be reduced in virtue of contribution negligence of the plaintiff. 

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[1] http://www.jcfia.gr.jp/channel/newspdf/67.pdf

[2] http://www.kokusen.go.jp/pdf/n-20040415.pdf

Concept of the suitability rule in Japan

Development

Like as foreign countries, the principal of the Suitability rule has been progressing in the financial transaction fields. Initially, the concept was found in the fair commercial practices notice issued by the Ministry of Finance on December 2^nd 1974. It asked the securities company to strengthen their compliance due diligence for customer’s interest.The notice demanded that the securities companies were necessary to consider the customer’s intention and the status quo; as particular elements, knowledge, experience and the status of finance were indicated there.Afterwards, the concept was introduced in the Commodity Futures Transaction Law. Recently, the revised Fundamental Consumer Protection in 2006 stipulated the notion in the article (sec. 5(1)(iii)).[1]

Laws and provisions

The laws that adapt this notion are growing except above mentioned laws: the administrative regulation of the Specific Trading Practice Law (sec. 7(3)), the Financial Products Trading Law (sec.40(1)), the Commodity Futures Transaction Law (sec. 215), the Financial Products Sales Law (sec. 8(2)), and so on.

In the process of Insurance Business Law reform, the advisory panel recommends to introduce the notion coming reform law.[2]

Moreover, the noticeable point is that many local governments introduce this notion as a unfair commercial practices in their ordinances. We can find a lot of administrative enforcements based on the breach of this provision: Tokyo[3], Hokkaido[4], Shizuoka[5], Gifu[6] and so on.

Usage

However, it also said the definition of the notion is varied and ambiguous. Most administrative punishment, therefore, are imposed with using other unfair practices prohibition, in addition to the suitability rule offence.However, since the Supreme Court decision, on July 14^th 2005 that indicated the possibility of damage compensation in tort by the breach this offence,[7] the atmosphere seems to be changing. The notion is getting easier to use as a material element of administrative punishment and damage compensation.

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[1] http://www.consumer.go.jp/kankeihourei/kihon/20040602-kihon.html

[2] http://www.fsa.go.jp/news/newsj/17/hoken/f-20060301-1.pdf

[3] http://www.metro.tokyo.jp/INET/OSHIRASE/2007/01/20h1b400.htm　

[4] http://www.pref.hokkaido.lg.jp/NR/rdonlyres/261F50A9-7F38-4C93-9ABD-F465C44B5064/0/hp181211.pdf　

[5] http://www.pref.shizuoka.jp/seibun/sb-12/kouhyou/sinihonhukuzyu.html　

[6] http://www.pref.gifu.lg.jp/contents/news/release/H18/z00001253/files/190123.pdf

[7] http://www.courts.go.jp/hanrei/pdf/8B2BAEC7DB79F1EC492571240026988E.pdf