Japan's financial regulator has imposed penalties on Mitsubishi UFJ Financial Group (MUFG) and its joint ventures for violating client confidentiality rules, potentially dealing a blow to their business operations.

The Financial Services Agency (FSA) has ordered MUFG Bank, Morgan Stanley MUFG Securities Co., and Mitsubishi UFJ Morgan Stanley Securities Co. to improve their operations and submit reports by 24 July detailing the causes of the breaches and planned preventive measures.

The Securities and Exchange Surveillance Commission, the FSA's investigative arm, uncovered at least 26 instances of inappropriate client information exchange between the entities in an attempt to secure business. Additional improper conduct was also identified, including cases where MUFG Bank sought to win underwriting business for its brokerage unit.

Finance Minister Shunichi Suzuki emphasised the gravity of the situation, stating, "We hope that MUFG will take this matter seriously and take drastic measures for improvement, including the management control system, to ensure that such a situation will never occur again."

The scandal has shaken confidence in Japan's largest banking group, with some clients reportedly moving their bond underwriting business elsewhere. Japanese regulations prohibit commercial and investment banking arms of the same financial group from sharing client data without consent, partly to prevent lenders from abusing their bargaining positions.

MUFG has acknowledged the seriousness of the business improvement order and pledged to prevent future occurrences. Morgan Stanley MUFG Securities also committed to promptly submitting a remediation plan.

This incident follows less than two years after rival Sumitomo Mitsui Financial Group faced penalties for market manipulation charges, highlighting ongoing compliance challenges in Japan's banking sector.

The banking industry has long advocated for easing these restrictions, arguing that allowing lenders and their group brokerages to offer products and services together would better serve clients' interests. However, this recent breach may further complicate such efforts.

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