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Mitsubishi (MUFG) Penalized for Breaching Client Confidentiality

Mitsubishi UFJ Financial Group Inc. MUFG units are under investigation by Japan’s securities regulator, Securities and Exchange Surveillance Commission (“SESC”), for compromising its clients' confidentiality by bypassing firewalls between the bank's operations.

SESC mentioned that MUFG Bank Ltd., Morgan Stanley MUFG Securities Co. and Mitsubishi UFJ Morgan Stanley Securities Co. shared confidential customer details on at least 10 occasions to attract more business. The exchange breached the regulatory firewalls that were established to prevent commercial and investment banking units from sharing client data.

The commercial and investment banking divisions within the same financial group require a strict separation in order to secure client information and avoid any conflicts of interest to arise. These regulations prevent financial institutions from using privileged information to gain an unfair advantage in business negotiations.

For an extended period, Japanese banks have advocated for the relaxation of firewalls, citing their impediment to merger advising and business succession planning.

According to the SESC, the three firms knowingly shared non-public client data, including material information that could influence investment decisions, despite the client’s reluctance to allow such exchanges. Moreover, MUFG’s employees’ performances were evaluated partly based on the business they directed to Mitsubishi UFJ Morgan Stanley Securities (“MUMSS”) in order to increase group-wide income, per the SESC findings.

MUFG’s management stated, “We sincerely apologize for the inconvenience and concern this has caused our customers and other stakeholders”. They further added “We accept that the current recommendation calls for the appropriate enhancement and acceleration of internal control and checking functions of the MUFG Group Companies in a manner that suits the actual conditions of the banking-securities collaborative business.”

The current investigation led to the fallout of business. In lieu of this, Aeon Co., Kanagawa Prefecture, and Japan Housing Finance Agency decided to drop from bond underwriting contracts with MUMSS.

The investigation represents the most recent financial crisis to emerge in Japan and represents a setback to the biggest bank in the country, which lost more than $700 million in client losses on Credit Suisse's riskiest bonds last year that they had bought through its brokerage partnership with Morgan Stanley MS.

The previous case had already shaken the bank's reputation to a great extent and this new scandal makes it more difficult for MUFG to regain the trust of its customers and to rebuild its image within the financial market.

The investigation may disrupt the competitive positioning of the joint ventures of MUFG with Morgan Stanley. The joint venture between both companies was set to overtake Nomura Holdings Inc. as Japan's premier brokerage by combining their Japan equity sales and research for institutional investors. Although Morgan Stanley currently holds the leadership position in advising on Japan-related mergers, the ongoing scandal involving MUFG could significantly impact MS’ market standing and future prospects in the region.

Over the past six months, shares of MUFG have lost 2.9% on the NYSE against the industry’s 1% growth.

Zacks Investment Research
Zacks Investment Research


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Currently, MUFG carries a Zacks Rank #4 (Sell).

Stock to Consider

A better-ranked stock from the finance space is NatWest Group plc NWG, flaunting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.

NWG’s 2024 earnings estimates have been revised upward by 1% over the past 60 days. Shares of NatWest Group have gained 27.2% in the past three months.

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Morgan Stanley (MS) : Free Stock Analysis Report

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