New Financial Authority Proposed (OJK)

Written by Ira Eddymurthy & Maria Yudhitama

On October 27, 2011, Parliament signed the Law regarding the Financial Service Authority (Undang-Undang tentang Otoritas Jasa Keuangan) (“OJK Law”).  We expect the President of the Republic Indonesia will sign the bill within 30 days after being signed by Parliament. The OJK Law makes provisions for the creation of an independent institution (“known as OJK”) to supervise banks, non-bank financial institutions and capital markets in Indonesia.

The idea for an independent supervisory institution was conceived during the early reform era of the late 1990s, when the Government proposed the draft Bank Indonesia Law in 1999. The draft Bank Indonesia Law initially suggested the transfer of Bank Indonesia’s supervisory powers over banks to another independent authority. However, this idea has never been implemented by law until now.

In order to create an OJK umbrella institution, supervisory powers will be transferred from Bank Indonesia, which supervises banks, and the Capital Market and Financial Institution Supervisory Agency, (“Bapepam-LK”) in the Ministry of Finance, which supervises non-bank financial institutions, such as insurance companies, pension funds, finance institutions and capital markets. Further, Bapepam-LK will separate from the Ministry of Finance and will merge with OJK.

What is the scope of the OJK Law?

The OJK Law only provides the organization and governance of the OJK.  Consequently, each industry will continue to be governed by their respective laws and regulations, among others: Law No. 7 of 1992 regarding Banking as amended by Law No. 10 of 1998; Law No. 8 of 1995 regarding Capital Market; Law No. 2 of 1992 regarding Insurance Business and Law No. 11 of 1992 regarding Pension Fund.  The OJK Law stipulates that the preceding laws and regulations will prevail unless they are contrary to the OJK Law.

What is the authority of OJK?

Pursuant to Article 6 of the OJK Law, the OJK has the authority to regulate and supervise financial service activities in the banking sector, capital markets sector and the activities of non-bank financial institutions. Furthermore, to accomplish the preceding regulatory and supervisory aims, the OJK has the authority to, among others: enact laws and regulations, grant or revoke licenses, examine and investigate violations and impose sanctions.

What is the structure of OJK?

The OJK’s Board of Commissioners will be responsible for the agency, and will oversee the institution’s regulatory powers. The OJK supervisory powers will be exercised by the Executive Head of each sector, that is, the Executive Head of Banking, the Executive Head of Capital Market and the Executive Head of Non-Bank Financial Institutions.  The Board of Commissioners will act as a watch dog, ensuring that each Executive Head’s duties are performed properly.

The Board of Commissioners will be comprised of 9 persons appointed by a Presidential Decree, consisting of 7 permanent staff members and 2 ex-officio staff representatives of Bank Indonesia and the Ministry of Finance.  For the appointment of the 7 permanent staff members, the Selection Committee, will choose 7 persons from a list and provide their names to the President.  Then, the Parliament will formally elect these 7 persons to the Board, but their appointment will not become legally effective until the President issues his Decree.  This process must be completed within 8 months of the enactment of the OJK Law.  Bank Indonesia and the Ministry of Finance must propose 1 member each, to be added to the Board within 7 months of the enactment of the OJK law.

Once all members of the Board have been appointed, the Board of Commissioners shall form a transition team to ensure a smooth transition of Bank Indonesia’s and Bapepam-LK’s powers to OJK.

When will OJK begin work?

It is anticipated that the banking supervisory powers of Bank Indonesia will be transferred to the OJK by 31 December 2013.  Meanwhile, the supervisory powers of Bapepam-LK will be transferred to the OJK on 31 December 2012.  During the transitional period, Bank Indonesia and Bapepam-LK will continue performing their supervisory functions.  The OJK Law further stipulates that all licenses and approvals issued by Bank Indonesia and Bapepam-LK will be valid even after their functions are transferred to the OJK.

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