Indonesian Financial Regulation: A Year in Review

OJK

The Financial Services Authority (Otoritas Jasa Keuangan or OJK), the financial services supervisory body in Indonesia, issued more than 30 regulations in 2014 covering capital markets, banks and non-bank financial institutions. Muliaman Hadad, the chairman of the Board of Commissioners of the OJK, issued a statement that the enactment of the regulations supported the goals of the OJK in developing the financial sector in Indonesia.

Banking Sector

The OJK issued seven regulations in the banking sector in 2014, three of which were new regulations and four that amended previous regulations. Two of the new regulations – OJK Regulation No. 17/POJK.03/2014 and OJK Regulation No. 18/POJK.03/2014 – concern the implementation of integrated risk management and corporate governance for financial conglomerates. The third, OJK Regulation No. 19/POJK.03/2014, concerns non-office financial services (branchless banking), which is further discussed below.

Those regulations that amend previous regulations are focused on sharia banks and sharia business units. In particular, OJK Regulation No. 16/POJK.03/2014 concerns the assessment of quality assets; OJK Regulation No. 21/POJK.03/2014 stipulates provisions on minimum capitalization; and OJK Regulation No.8/POJK.03/2014 concerns the assessment of soundness level.

The OJK also amended regulations on rural banks (OJK Regulation No. 20/POJK.03/2014), which revoked Bank Indonesia Regulation No. 8/26/PBI/2006 on rural banks.

Branchless Banking

Branchless banking is being introduced by the Indonesian government as the implementation of its commitment as a member of the G20 to improve access for lower-income consumers. OJK Regulation No. 19/POJK.03/2014 authorizes banking agents (such as village heads or head of neighborhood units) to reach out to micro-customers in their respective areas. These banking agents are able to assist micro-consumers to open a bank account, to receive customer savings, to distribute micro-credits and to act as sales agents for micro-insurance. Since this system is addressed to lower-income customers, requirements for such activities are looser than for other customers, e.g., no monthly administrative fee, no minimum balance and no minimum deposit.

Non-Bank Financial Institutions

The major development in 2014 for the non-bank financial sector was the issuance of the long-awaited new Insurance Law (Law No. 40 of 2014). This law revokes the previous insurance law, i.e., Law No. 2 of 1992, but the implementing regulations under the old insurance law still prevail as long as they do not contradict provisions of the new Insurance Law.

One of the most significant changes introduced by the new Insurance Law is the local shareholding requirement for insurance and reinsurance companies, as well as insurance intermediary companies. The new law requires any local shareholder of an insurance business entity to be ultimately owned by Indonesian individuals. This is a drastic change from the previous regime, which allowed local shareholders in insurance business entities to be ultimately owned by foreigners.  Insurance business entities have five years from the enactment of the new Insurance Law to comply with this new requirement, either by selling the shares currently held by the foreign party to an Indonesian individual/entity or through an initial public offering.

Other changes worth noting under the new Insurance Law include the single presence policy, which limits a party to be a controlling shareholder in one insurance or reinsurance company, the requirement to appoint a controller who will be responsible for any losses of the insurance/reinsurance company under its control, and the requirement to separate the sharia unit of an insurance/reinsurance company to be a stand-alone sharia entity.

As a result of the above changes, we would expect to see an increase in restructuring activities among insurance and reinsurance companies, particularly to fulfill the requirements on local shareholding, single presence policy, controller and separation of sharia units. We note that the Insurance Law mandates the OJK and the government to prepare Government Regulations and OJK Regulations with regard to foreign ownership of insurance companies and OJK Regulations on licensing and reporting procedures, good corporate governance, fit and proper tests, controller provisions and financial soundness.

In addition to the above, we note that in 2014 the OJK issued 15 regulations on the non-banking financial sector, focused mainly on the micro-financing and multi-finance sectors. The newly enacted regulations on the micro-financing sector consist of the general business implementation of micro-financial institutions (OJK Regulation No. 13/POJK.05/2014) and guidance and supervisory provisions (OJK Regulation No. 14/POJK.05/2014). The newly enacted regulations on the multi-finance business concern general provisions (OJK Regulation No. 29/POJK.05/2014), sharia multi-finance business (OJK Regulation No. 31/POJK.05/2014), good corporate governance (OJK Regulation No. 30/POJK.05/2014) and licensing provisions (OJK Regulation No. 28/POJK.05/2014).

Capital Markets Sector

In 2014, the OJK issued more than 20 regulations on the capital markets sector, which we divide into three sub-sectors: investment management, securities transactions and institutions, and issuers and public companies.

In the investment management sub-sector, we note that the OJK issued six regulations in 2014. Those concerned mutual funds (OJK Regulation No. POJK 37/POJK.04/2014 on mutual funds in the form of investment collective contract of limited participation, and OJK Regulation No. 39/POJK.04/2014 on mutual fund selling agents).  The other regulations in this sub-sector concern the functions and licensing of investment managers, monthly reports for collective investment contracts for asset- backed securities and participation letters for secondary mortgage financing.

For 2015, we note that the OJK is expected to discuss and issue regulations on pricing errors, mutual funds based on offshore securities, hedge funds and the amendment of Capital Market Supervisory Agency and Financial Institution (“Bapepam-LK”) Regulation No. V.G.1 regarding Prohibited Actions for Investment Managers.

In the securities transactions and institutions sector, we note that the OJK issued two regulations, on securities transaction settlement guarantee (OJK Regulation No. 26/POJK.04/2014) and licensing procedures for underwriters and brokerage firms (OJK Regulation No. No. 27/POJK.04/2014, which revokes Bapepam-LK Regulation No. V.B.1).

For 2015, we note that the OJK is expected to discuss and issue regulations concerning guidelines on repo (repurchase agreement) transactions for financial institutions, licensing procedures for securities companies that act as underwriters and securities brokers, and guarantee funds based on transaction value.

In the issuers and public companies sub-sector, the OJK issued six regulations that constitute new provisions. These regulations concern nomination and remuneration committees (OJK Regulation No. 34/POJK.04/2014); the implementation of general meeting of shareholders (OJK Regulation No. 32/POJK.04/2014); the board of directors and board of commissioners of issuers and public companies (OJK Regulation No. 33/POJK.04/2014); corporate secretary (OJK Regulation No. 35/POJK.04/2014); sustainable public offering of debt securities and Islamic bonds (OJK Regulation No. 36/POJK.04/2014); and increase of capital without pre-emptive rights (OJK Regulation No. 38/POJK.04/2014).

We note that the OJK is planning to discuss and issue numerous regulations in 2015, which will either constitute new provisions or amend previous provisions. New regulations expected in 2015 include the long-awaited regulation on employee stock ownership programs, exceptions for reporting and announcement requirements for issuers and public companies, and the role of capital market supporting professions. Existing regulations expected to be amended in 2015 include: Bapepam-LK Regulation No. X.K.1 regarding Information to be Disclosed Immediately to the Public; Bapepam-LK Regulation No. IX.H.1 on the Acquisition of Public Companies; Bapepam-LK Regulation No. IX.D.1 regarding Pre-Emptive Rights; and Bapepam-LK Regulation No. X.K.4 regarding Report on the Utilization of Proceeds from Public Offerings.

We also note that the OJK is expected to issue a package of regulations in the sharia capital markets sector, including regulations on the implementation of sharia principles in capital markets, issuance of sharia stocks, Islamic bonds, sharia mutual funds and sharia asset-backed securities, and the provision of sharia experts in capital markets.

In addition to the above, the OJK has coordinated with self-regulatory organizations (Indonesia Stock Exchange (IDX), Indonesian Central Securities Depository (KSEI) and Securities Underwriting Clearing Indonesia (KPEI)) on the issuance of three regulations. These are IDX Regulation No. 1-A on Listing of Stocks and Equity Securities other than Stocks Issued by Listed Companies, IDX Regulation No. 1-A.1 on Special Listing Procedure for Mining Companies and KSEI Regulations on access, audits and sanctions. The OJK is now in discussions with the self-regulatory organizations on the amendment of IDX Regulation No. III-B regarding Membership of Futures and Options, IDX Regulation No. 1-G regarding Listing of Islamic Bonds and KPEI Regulation No. III-A on Membership of Futures and Options Clearing.

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