Impact of comply-or-explain approach in new regulatory policy on Japanese mutual fund markets

<h2>Abstract</h2> The Japan Financial Services Agency (JFSA) has expressed concerns within the mutual fund industry regarding high fees, low performance, and distributors' marketing practices that encourage investors to frequently trade funds. In response, the JFSA introduced a new regulatory policy in 2015, promoting competition among financial institutions to provide high-quality financial products and services using a comply-or-explain approach, where compliance is not mandatory. This study investigates the effectiveness of this policy on mutual fund fees and risk-adjusted performances. We find that the policy has had limited impact: while the front load charged directly to investors decreases, the management fee deducted from investors' assets increases, and total fees during average investment periods do not show significant reductions. Additionally, risk-adjusted performances based on standard asset pricing models do not improve. These results suggest that managers and distributors may prioritize their own interests, deviating from the policy's objectives.