Rewarding customers without regulatory risk: Loyalty Points in Japan

The use of reward programs in Japan has grown in recent years – a trend predicted to continue. Generally used to promote customer loyalty, there is the potential that regulations will apply. This includes laws protecting consumers and their personal information.

Many companies have introduced loyalty point programs allowing customers to earn and use reward points to purchase other products or services specified in advance (Loyalty Points).

The domestic Loyalty Points market size has reached JPY 2,100 billion, according to a survey conducted by a Japanese company[1]. The market size has increased year-on-year since 2019 and is forecast to keep expanding, based on the survey.

Given this growth it is important for companies to be aware of restrictions regarding Loyalty Points. In this insight we focus on six matters to consider when introducing a program that involves Loyalty Points in Japan.

In the current market there are several types of Loyalty Points, but for the purpose of this insight we assume that:

• Loyalty Points can be earned as a percentage value of each eligible purchase
• unused Loyalty Points remain effective 6 months after the date of issuance, and
• Loyalty Points are non-transferrable.

Please note, the following applies to foreign companies that provide Loyalty Points globally or locally against the Japanese citizen. Therefore, when introducing any Loyalty Points program in Japan, the company should be aware of the regulatory risks.

Are Loyalty Points subject to Japanese financial regulations?

(1) Potentially, if they are ‘Prepaid Payment Instruments’

The Payment Services Act (Act No. 59 of 2009, the PSA) regulations apply when Loyalty Points are:

• classified as "Prepaid Payment Instruments" (PPI) under the PSA,
• are used as part of the business of the issuer of those Loyalty Points (the Issuer), and
• the unused amount as of the base date (March 31 and September 30 of each year) exceeds JPY 10 million.[2]

Whether or not certain Loyalty Points fall under the PPI depends on whether the Issuer receives consideration.

• Consideration received: If the Issuer receives any consideration at the time of issuance, Loyalty Points fall under the definition of the PPI and the Issuer must notify the relevant local finance bureau. The Issuer is subject to the following additional regulations[3]:
  • Disclosure of information designated by the PSA
  • Prohibition of refunds in principle
  • Management of information security
  • Establishment of a complaint handling system.
• No consideration received: If no consideration is received by the Issuer at the time of issuance, Loyalty Points are not subject to the regulations under the PPI.

When Loyalty Points that fall under the PPI are used for the business of a third party, the Issuer must be registered at the relevant local finance bureau or else face the risk of criminal penalties. To complete registration, the Issuer needs to:

• provide additional information and comply with additional requirements (in addition to the above-mentioned notice requirement), which will take time and effort, and
• meet certain conditions, such as establishing an internal system.

If a foreign company conducts the business of issuing prepaid payment instruments in a foreign country and those prepaid payment instruments fall under the definition of PPI, the company must not solicit a person in Japan for prepaid payment instruments issued by the foreign company. Therefore, if Japanese citizens can access the PPI it is advisable to take measures to disable that access from Japan.[4]

(2) Potentially, if they are an ‘Exchange Transaction’

When Loyalty Points fall under the definition of "Exchange Transaction", they are subject to the regulations of the Bank Act (Act No. 59 of 1981) or the PSA. This is likely when Loyalty Points:

• can be transferred freely, and
• can be refunded.

If a program involving Loyalty Points meets both of these requirements, it must be registered as a bank under the Bank Act or as a funds transfer service provider under the PSA. Both bank and funds transfer service providers are highly regulated.

Are Loyalty Points subject to the Act against Unjustifiable Premiums and Misleading Representations?

When Loyalty Points fall under the definition of "Premium" in accordance with the Act against Unjustifiable Premiums and Misleading Representations (AUPMR), they are subject to the regulations of the AUPMR.

There are several types of Premiums, such as Prizes, Joint Prizes and Gifts, under the AUPMR.

• Prizes and Joint Prizes must be conducted by a lottery, or superiority, of a specified act (for example, giving prizes to those who answer the quiz correctly).
• A Gift is a type of Premium which is not a Prize or Joint Prize. Examples include gifts provided by a business to customers who entered its store or used its services. Gifts are only restricted when they are provided to consumers rather than the business operator.

Gifts are restricted to a maximum amount based on transaction amounts, as follows:

Therefore, when Loyalty Points are a Premium, they cannot exceed the maximum amount permitted by the AUPMR.

Are Loyalty Points subject to the Consumer Contract Act (and therefore face the risk of invalidity)?

A "Consumer" under the Consumer Contract Act is an individual (excluding individuals who enter into certain agreements on behalf of businesses or for business purposes). Therefore, if the user of Loyalty Points is a Consumer, the Consumer Contract Act would apply.

A provision of a contract between a Consumer and an Issuer will be invalid if it:

• restricts rights which the consumer should have according to the directory provision[5] or imposes a heavier burden on a Consumer than the obligations imposed by the directory provision, and
• unilaterally infringes on the Consumer's interests to the extent that it violates the rule of good faith stipulated in Article 1, Paragraph 2 of the Civil Code (ie, the deviation exceeds the limit permitted under the Civil Code's rules of fiduciary principles embodied in Consumer contracts).

When determining whether a clause in a consumer contract is valid or not, several items such as the actual method of solicitation, advertisement, representation and the process of negotiation shall be considered. Not only those items listed above but the following items relating to consumer expectation are also advisable to be considered when determining the consumer contract:

• Whether the consumer's expectations are generally based on the terms and conditions, as the actual conditions of solicitation, advertisement and display, as well as the history of negotiations,
• Whether the expectations are worthy of protection, and
• Whether the business operator's disadvantageous treatment towards the consumer is significantly contrary to the consumer's expectations in relation to the content of prior explanations and representation.

Are Loyalty Points subject to the Personal Information Protection Act?

When obtaining Personal Information[6], a Personal Information Handling Business Operator (Business Operator)[7] is subject to the Personal Information Protection Act（Act No. 57 of 2003, the PIPA). In most cases, the Issuer can obtain Personal Information through the payment data of customers. So, Business Operators must specify the purpose for which the information is used as clearly as possible, and in practice, it may be appropriate to publicly announce that purpose in advance.

When a Business Operator provides Personal Data[8] to a third party located in a foreign country, it must obtain the prior consent[9] of the persons involved (Person) and disclose the following items:

• the system for protecting Personal Information in the foreign country
• the measures taken by the third party to protect Personal Information
• other information that may benefit the Person, and
• the relevant foreign country.

Are Loyalty Points subject to the Financial Instruments and Exchange Act?

In short, no. The Financial Instruments and Exchange Act (Act No.25 of 1948, the FIEA) defines "Financial Instruments Business" as a business that takes certain actions.[10] Among the examples listed are "purchase and sale of securities" and "intermediation, brokerage or agency for the purchase and sale of securities, market derivatives transactions, or foreign market derivatives transactions."

Additionally, the FIEA defines "Securities" by listing 21 specific items.[11] Types of Securities include government bond securities, corporate bond certificates, stock certificates, etc. However, Loyalty Points do not fall under any of the aforementioned items.

Therefore, Issuers are not subject to the FIEA.

Are Loyalty Points subject to Japanese Anti-Money Laundering (AML) regulations?

Again, the answer is no – for the time being. When business operators fall under the definition of "Specified Business Operator" (SBO) under the Act on Prevention of Transfer of Criminal Proceeds (Act No. 22 of 2007, the "APTCP"), they may be subject to the APTCP.

However, since Issuers of Loyalty Points are not listed as SBOs under the APTCP, they are not subject to the act.

The regulations discussed above are the major restrictions which may affect a Loyalty Points program. It is common to structure a Loyalty Points program in Japan by:

• not allowing any refunds from Loyalty Points to cash
• not allowing any purchase of Loyalty Points with cash, and
• not allowing any transfer to a third party.

However, depending on the structure of the Loyalty Points program, the relevant legal restrictions differ. It is highly advisable to obtain legal advice before implementing a Loyalty Points program in Japan.