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6035 - IR Japan Holdings News Story

¥12610 50.0  0.4%

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Sector
Industrials
Size
Mid Cap
Market Cap £1.45bn
Enterprise Value £1.41bn
Revenue £53.8m
Position in Universe 474th / 3903

EXCLUSIVE-An 'industry custom': Little-known fees help Japan trust banks dominate profitable niche market

Mon 1st March, 2021 2:08am
* Fees add millions to cost of switching stock transfer
agents
    * New provider expected to pay, keeping smaller competitors
out
    * Business has margins more profitable than banks' average

    By Makiko Yamazaki and Maki Shiraki
    TOKYO, March 1 (Reuters) - When Japan's Honda Motor Co Ltd
 7267.T  stopped using Sumitomo Mitsui Trust Bank Ltd as its
stock transfer agent last year, the lender slapped it with a
roughly $4 million termination fee, according to two people
familiar with the matter.
    The break fee - 2,000 yen ($19) per shareholder - is a
little-known practice among Japan's biggest trust banks when
they lose a client in the shareholder record-keeping business,
multiple insiders say. 
    The bank that takes the new client typically pays the fee.
Insiders say this arrangement keeps a profitable business in the
hands of a few big trust banks because newcomers balk at the
cost. One departing client was told the charge was an "industry
custom".
    Japan's three largest trust banks, Sumitomo Mitsui Trust
 8309.T , Mitsubishi UFJ Trust and Banking Corp  8306.T  and
Mizuho Trust & Banking Co Ltd  8411.T , control at least 97% of
the market, according to an internal bank document.
    Details of the fees, including the amount and the
expectation that the new bank pay, as well as Honda's
experience, are reported here for the first time.
    Some executives at listed companies privately express
frustration over the practice, which they say illustrates banks'
abuse of their considerable power in corporate Japan.
    It's not clear why banks' break fee amounts are identical.
The fees varied until the late 1990s, when weakened lenders were
consolidating, one of the people familiar with the matter said. 
    "It's not right to charge 2,000 yen for doing nothing. Any
way you look at it, it's a barrier to entry and in violation of
anti-trust laws," said one executive at a major manufacturer. He
and other sources declined to be identified because the
information isn't public.
    Transfer agents keep records of a company's shareholders,
process dividend payments and count votes at annual general
meetings. Mitsubishi UFJ Trust shouldered Honda's fee when it
took over records of the automaker's roughly 210,000
shareholders, according to the two people familiar with the
matter.
    Honda said it couldn't comment on the content of contracts. 
    Sumitomo Mitsui Trust, Mitsubishi UFJ Trust and Mizuho Trust
said they charge administrative fees when a client leaves. All
declined to comment on the amount of the fees or on specific
transactions. 
    Mizuho Trust said that contracts differed from client to
client, and that there are cases in which it discusses the break
fee from a former transfer agent when negotiating a contract. It
said that the fees were appropriate and that its business
complied with the law.
    Mitsubishi UFJ Trust said there was no legal issue with the
fees because the trust banks had not agreed on them together.
    A spokesman for the Japan Fair Trade Commission declined to
comment.
    A representative for the regulatory Financial Services
Agency (FSA) said: "Contracts in the private sector are at the
discretion of each company".
    
    'INDUSTRY CUSTOM'
    Trust banks came under scrutiny last year after Sumitomo
Mitsui Trust and Mizuho Trust separately revealed widespread
failure to count all valid votes at annual general meetings over
the last two decades. Both have apologised and pledged to revise
practices.  urn:newsml:reuters.com:*:nL3N2GL2L5  urn:newsml:reuters.com:*:nL4N2GR12J
    Banks don't always make break fees explicit in contracts,
one of the people familiar with the matter said. 
    Mitsubishi UFJ Trust said that in general, administrative
fees are determined after discussions with the client. Mizuho
Trust said there are cases where it spelled out the fees in
contracts.   
    Another executive, at a midsize listed firm, said his
company refused to pay when switching transfer agents years ago.
    "There was no clause for specific break fees in our contract
but the bank demanded it, saying it was an industry custom," the
executive said. "I told them it doesn't make sense." 
    His company never paid the fee and the bank gave up trying
to collect it, he said.
    For decades, the transfer agent business was labour
intensive because stock certificates and other records were
handled manually. But digitalisation has helped streamline it,
making it more profitable, industry insiders say.
    Sumitomo Mitsui Trust's transfer agent business, which
includes two small subsidiaries, had a 49% profit margin in the
last financial year, compared with 39% for the bank overall,
according to regulatory filings.
    At Mitsubishi UFJ Trust, it was 60% for the business, nearly
double the bank's overall margin of 31%. Mizuho Trust doesn't
give a breakdown for the business. 
    
    ANTI-MONOPOLY LAWS
    When a client moves, the banks just need to retrieve and
forward their database records, according to the two executives,
one of the people familiar with the matter and another industry
insider. 
    Although the volume of data depends on the number of
shareholders a company has - some of Japan's biggest firms have
700,000 or more - the records are supplied electronically by the
Japan Securities Depository Center, a common platform for stock
transfers.
    Mitsubishi UFJ Trust said other data needed to be prepared
and transferred, including dividend payment records.
    "If the break fees cannot be rationally explained and serve
as an obstacle to newcomers, the practice could be against
anti-monopoly laws," said Yasuo Daito, a lawyer specialising in
antitrust issues at Nozomi Sogo Attorneys at Law. 
    But if larger banks' services are simply better than those
of potential challengers, then a violation of anti-monopoly laws
would be less likely, Daito said.       
    Investor-relations firm IR Japan Holdings  6035.T  in 2012
became the first new market entrant in four decades. It now has
a 1% share. 
    IR Japan said it doesn't charge break fees. It declined to
comment on the practice.
($1 = 104.8600 yen)

 (Reporting by Makiko Yamazaki and Maki Shiraki; Additional
reporting by Takashi Umekawa, Noriyuki Hirata and Yuki Nitta;
Editing by David Dolan and Gerry Doyle)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))
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