Customer-Oriented Financial Services Cannot Be Built by the Front Line Alone

Japan’s latest FSA monitoring report points beyond individual product sales to the management systems, incentives and service models that shape customer outcomes.

Japan’s Financial Services Agency (FSA) published the results of its latest monitoring of customer-oriented business conduct by manufacturers and distributors of risk-bearing financial products on July 29, 2026.

The Principles for Customer-Oriented Business Conduct were first published in March 2017. Since then, the issues examined through the FSA’s monitoring have changed substantially: excessive switching of investment trusts, dependence on sales commissions, regular investment plans, customer segmentation, the transition toward recurring-revenue business models, structured bonds, foreign-currency-denominated single-premium insurance, cooperation between banks and securities companies, product governance and the three-lines model.

Management involvement and PDCA are not new themes. By the 2020 fiscal-year monitoring cycle, the FSA was already discussing how financial institutions could reconcile customer-oriented business conduct with sustainable business models. In the following year, it also highlighted the need to translate management strategy into frontline sales activity, evaluate the results and improve the approach through a PDCA cycle.

What feels different in the latest report is that PDCA is no longer simply one topic among many. It has become the analytical framework running through the report as a whole.

The Same Problems Have Reappeared Across Different Products

The background to this shift is described relatively directly by the FSA.

Over the years, regulators have raised concerns about practices including frequent switching of investment trusts, repeat sales following the early redemption of structured bonds, replacement sales of target-type foreign-currency-denominated single-premium insurance, and short-term trading of foreign equities.

The products have changed, but similar problems have continued to reappear.

When one sales problem is corrected, a similar issue may later emerge in another product category. Put somewhat critically, both financial regulators and distributors can end up playing an endless game of whack-a-mole.

That raises a more fundamental question: are individual products and individual sales techniques really the only things that need to be fixed?

In its latest report, the FSA states that it changed its monitoring approach to focus more closely on the mechanisms and processes through which financial institutions put customer-oriented business conduct into practice.

This moves the discussion one level above individual products. The question becomes not simply whether a particular sale was appropriate, but why similar patterns of behavior continue to arise and what management structures are producing those behaviors.

In my view, this is the most important feature of the latest report.

Sales Behavior Is Shaped by the Management System

The report itself is organized around the PDCA cycle: Plan, Do, Check and Act.

But the PDCA being discussed here is not simply a process in which a sales department sets an annual sales plan, reviews the results and develops measures for the following year.

The starting point is the institution’s management philosophy and vision.

From there, management determines the retail business strategy: which customers the institution intends to serve and what value it intends to provide. That strategy is then reflected in policies, organizational structures, the allocation of people and management resources, sales targets, performance evaluation systems and the product lineup.

The next question is what behaviors these arrangements actually produce on the sales floor and what outcomes they generate for customers. The institution must then evaluate those outcomes and, where necessary, trace problems back to their root causes and make improvements.

It is this entire chain of causation that the FSA is now examining.

This represents an important shift in perspective.

When inappropriate sales of financial products occur, attention naturally turns to frontline staff. Institutions may respond by telling salespeople to understand customer needs more carefully, reinforce customer-oriented conduct or undergo additional training.

All of those measures can be important.

But consider an institution that tells its employees to put customers first while simultaneously operating a performance evaluation system that gives higher ratings to employees who generate greater commission revenue. Which message is more likely to influence behavior?

Previous monitoring has identified efforts by financial institutions to move away from evaluations centered on sales commissions toward systems that place greater weight on client asset balances. At the same time, the FSA has also pointed to cases in which revenue-related measures continued to carry substantial weight, limiting the effect of customer-oriented criteria on overall performance evaluations.

People do not act on corporate philosophy alone. They also respond to what the organization rewards.

What happens on the sales floor is therefore not simply a matter of the ethics or judgment of individual salespeople. It is also the outcome of systems designed by management: product policy, revenue targets, staffing, resource allocation and performance evaluation.

Viewed this way, “customer-oriented business conduct” takes on a broader meaning.

It is not merely a code of conduct that the compliance function asks salespeople to follow. It is a management question about which customers the institution serves, what value it provides, how it earns revenue, where it allocates people and resources, and which behaviors it chooses to reward.

In other words, before customer orientation is a question of developing “better people,” it is a question of designing an organization in which behavior that is desirable for customers is also rational for employees and for the business.

If a company declares customer orientation in its management philosophy while its business strategy, numerical targets, staffing and incentive structures point in another direction, it is difficult to expect the sales floor alone to reconcile the inconsistency.

That, in my reading, is why the latest monitoring report repeatedly calls for active involvement by senior management.

Fund Wraps Raise a Question About the Value of the Service

Another part of the report that I found particularly interesting concerns fund wrap services.

Fund wraps in Japan have often been discussed in relation to their relatively high costs compared with investment trusts and to investment efficiency in lower-risk portfolios.

The latest report remains critical on this point. Among other observations, it notes that for lower-risk courses, actual returns after total costs over the 2015-2024 fiscal-year period were below expected returns, highlighting the need to examine whether customers are receiving economic value commensurate with the costs they bear.

At the same time, the FSA does not reject the fund wrap model itself.

Rather, it recognizes that a fund wrap can potentially serve as a comprehensive service combining the design and management of an asset allocation tailored to an individual customer with ongoing customer support. Depending on the customer’s investment objectives and financial circumstances, such a service may be one option for supporting stable, long-term asset building.

That distinction is important.

Japan has moved back into an environment with positive interest rates, meaning that time deposits and yen-denominated bonds can once again provide some yield. Investors also have access to relatively simple and low-cost ways to implement diversified asset allocation, including balanced index funds.

Against that background, what justifies paying an additional fee for a fund wrap?

The FSA organizes the services underlying fund wrap fees into three broad areas: investment design and management; consulting, customer engagement and ongoing support; and investment management of the underlying funds and other products.

The second category is particularly significant. It includes understanding the customer’s investment objectives and risk tolerance, advising on financial planning, following up during market fluctuations or life events, and supporting decision-making through ongoing communication.

This is quite different from a simple debate about whether a fee is high or low.

The level of the fee matters, of course. Its reasonableness must be assessed in light of risk, return and available alternatives.

But price alone does not determine whether a service is good or bad.

The more important questions are: what is the fee being paid for, and is the corresponding value actually being delivered?

The FSA’s framework allows for more than one answer. Provided that customers receive value commensurate with the costs they bear, an institution might choose to narrow its service and reduce costs, or it might choose to provide a broader service and increase the value delivered.

This framework also resonates with a principle that JAMP has long emphasized in building infrastructure for goal-based asset management services.

For customers, the ultimate objective is not simply to hold an optimal portfolio. It is to have a plan for achieving their life goals, to continue implementing that plan and to revise it when circumstances change.

Asset management, portfolios and financial products are means to that end.

Seen from this perspective, the issue extends well beyond fund wraps.

It also raises questions about the word “sales” itself.

The value added by a customer-facing financial institution lies in more than simply distributing products manufactured by asset managers. 

It also lies in understanding a customer’s life plan and overall financial position, considering what financial preparation is required, developing a plan, selecting appropriate financial products and services, supporting implementation, and revisiting that plan as markets and life circumstances change.

The FSA’s discussion of fund wraps is particularly suggestive in this regard because it explicitly refers to consulting functions such as reviewing and maintaining portfolios in response to changes in a customer’s life plan or investment policy.

If a fund wrap is viewed simply as a relatively expensive product combining multiple investment trusts, the criteria used to evaluate it will be one thing.

If it is viewed instead as an ongoing wealth-building support service, the criteria become different.

In that sense, fund wraps may be less important as a single product category than as a test of whether the retail financial business in Japan can evolve from “selling financial products” toward continuously supporting customers in building assets in line with their life plans.

Asset Management Services Depend on Both Manufacturing and Delivery

The FSA’s latest monitoring report can also be read alongside the Progress Report 2026 on Enhancing Asset Management Services, published a few days earlier.

The two reports address different subjects, but they appear to examine opposite sides of the same asset management services value chain.

In my previous column, I interpreted one of the central questions in the Progress Report as how to enable asset management companies to become, once again, companies that concentrate on asset management.

Functions that do not necessarily need to constitute a manager’s competitive advantage can consume substantial people and capital. Where appropriate, standardizing or externalizing noncompetitive functions can allow asset managers to redirect resources toward corporate research, investment decision-making, portfolio construction, product design and understanding beneficiaries.

The objective is to create an operating model that allows asset managers to concentrate more of their resources on the areas where they generate distinctive investment value.

The question now being put to financial institutions on the distribution side is surprisingly similar.

Accumulating sales volume, or simply providing the required product explanations correctly, is not in itself the distinctive value that a customer-facing financial institution can provide.

The issue is how much of its limited people and management resources it can direct toward understanding customers, designing financial plans based on their life objectives, selecting suitable products and services, and supporting implementation over the long term.

Asset managers and distributors therefore create value through different forms of expertise.

An asset manager selects investment opportunities and generates value through investment judgment and portfolio management in accordance with the investment objectives entrusted to it.

A customer-facing financial institution starts with the customer’s life plan and financial circumstances, identifies the goals to be achieved and the plans required, selects appropriate financial services-including asset management solutions-and provides ongoing support for implementation.

Both operate within the broader asset management service chain, but their professional roles are not the same.

Even an excellent investment product will not necessarily create customer value if it is provided without regard to the customer’s objectives or overall financial position.

Conversely, even high-quality financial planning and consulting cannot support successful asset building if the investment products ultimately selected fail to provide sufficient value.

Improving only the manufacturing side or only the delivery side is therefore not enough to improve the overall value of asset management services.

This leads to a broader structural question.

What should asset managers and customer-facing financial institutions each define as their own sources of added value? Which functions should they retain, and which can be entrusted to specialized providers or common platforms? And how should information about customer needs, product characteristics and outcomes after distribution circulate between the manufacturing and delivery sides?

The division of responsibilities across the value chain itself needs to be considered.

What Is the Customer Paying For?

Since the Principles for Customer-Oriented Business Conduct were introduced in 2017, the FSA has continued to examine recurring sales issues across investment trusts, structured bonds, foreign-currency-denominated single-premium insurance, foreign equities and other products.

After years of examining individual problems as they emerged, the latest monitoring report places greater emphasis on the management systems that produce those outcomes.

To change what happens on the sales floor, institutions may need to change the performance evaluation systems and product policies above it.

To change those systems, they may in turn need to reconsider the revenue model of the retail business and the way management resources are allocated.

In that sense, it may have been inevitable that a regulatory discussion that began with individual products would eventually lead back to management itself.

The JAMP Group also seeks to contribute to this type of structural change by building platforms that allow asset managers and financial institutions to avoid carrying every function internally and instead concentrate management resources on the areas where they can genuinely create value.

The longer-term objective is not an industry that simply becomes more efficient at “manufacturing and selling” financial products.

It is an industry in which investment expertise and customer-support expertise can be combined appropriately to provide financial services that have meaningful value in customers’ lives.

Taken to its conclusion, the question facing customer-facing financial institutions is remarkably simple.

What, exactly, is the customer paying for?

Is the fee compensation for selling or intermediating a financial product?

Or is it compensation for working backward from the life the customer wants to achieve, developing a plan together, selecting appropriate means and supporting execution over many years?

My reading of the latest FSA monitoring report is that the discussion of customer-oriented business conduct is moving beyond a code of behavior for the sales floor.

It is becoming a question for senior management about what value the retail financial business exists to provide—and, ultimately, what customers are paying for.

FAQ

What is Japan’s FSA focusing on in its latest customer-oriented business conduct monitoring?

The FSA is placing greater emphasis on the management structures and processes that shape customer outcomes, rather than looking only at individual products or individual sales practices. This includes business strategy, resource allocation, sales targets, performance evaluation, product lineups, implementation, outcome measurement and subsequent improvement.

Why does the report emphasize PDCA?

The report uses Plan, Do, Check and Act as a framework for examining the full chain from management philosophy and retail strategy through frontline behavior and customer outcomes. The emphasis is on identifying and addressing root causes when results are inconsistent with customer-oriented objectives.

What does the FSA say about fund wrap services?

The FSA continues to scrutinize whether costs are justified by the economic value delivered to customers, particularly in lower-risk portfolios. At the same time, it recognizes that fund wraps can potentially provide value as comprehensive services combining portfolio design and management with consulting, ongoing customer engagement and support.

Why is this relevant to asset managers as well as distributors?

Customer outcomes depend on both sides of the asset management value chain. Asset managers create value through investment expertise and portfolio management, while customer-facing institutions create value through customer understanding, planning, product and service selection, and ongoing implementation support. Strengthening only one side is unlikely to maximize the value of the overall service.

Author: Keiichi Ohara, President & CEO, JAMP Corporation
About This Article
This article is an adapted English edition of JAMP Perspective, originally written in Japanese by Keiichi Ohara and distributed on August 12, 2026. It has been edited and supplemented where necessary to make the discussion and its Japan-specific context clearer to readers outside Japan. It is therefore not a direct translation of the original Japanese newsletter.
This article is provided for informational purposes only and does not constitute investment advice or a recommendation regarding any financial product.