(Bloomberg) -- Japan’s financial watchdog plans to examine how global investment banks sell controversial structured bonds in the country, according to people with knowledge of the matter, a sign that a crackdown on the products is gathering pace. 

The Financial Services Agency will check whether the main issuers of such products disclose enough information to local financial firms, which buy and then distribute them to retail investors across the country, the people said, declining to be named as the discussions are private. Japan’s FSA will also look into the fees charged, the people said.

There is a possibility that the Securities and Exchange Surveillance Commission will also conduct inspections on foreign securities firms if that’s deemed necessary, said an official from the FSA’s enforcement arm, in response to queries from Bloomberg. An official at the FSA declined to comment. 

Regulators in Japan have stepped up scrutiny of how structured bonds are marketed after receiving numerous complaints from buyers who suffered unexpected losses. Already, the heightened oversight has pushed several of the nation’s biggest lenders, including the banking unit of Sumitomo Mitsui Financial Group Inc. as well as Mizuho Financial Group Inc., to curb or suspend sales of the structured products. Regulators have said the products are too complicated for most people to fully understand and pricing isn’t transparent.

The main players that originate and sell structured bonds to Japanese financial firms are large US and European banks, according to Hideyasu Ban, a Jefferies analyst in Tokyo. Barclays Plc, Credit Suisse Group AG, UBS Group AG, BNP Paribas SA, Citigroup Inc. and Morgan Stanley are among global banks that offer such products. 

“As always, we stand ready to cooperate fully with the Japanese authorities,” said UBS spokesman Tsukasa Noda. The rest of the banks declined to comment. 

Sales of structured bonds totaled 4.15 trillion yen ($28.9 billion) in the fiscal year ended March 31 2022, slightly lower than 4.47 trillion yen in the previous year, according to data from the FSA.

Structured bonds include products linked to the performance of various underlying assets or indexes, potentially exposing holders to large losses in times of market stress. 

While the FSA hasn’t verified the complaints from buyers, they are enough to prompt the regulator to take stronger actions as Japan ramps up efforts to encourage households to invest more of their bank deposits.

In annual policy guidelines released last month, the agency said it will monitor whether financial institutions have a system in place to create, sell and manage products in a way that will contribute to clients’ wealth creation, taking particular aim at the complexity and volatility of structured bonds. 

(Updates with FSA details in penultimate paragraph.)

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