Indonesian Financial Services Authority in Review

Deal News

As mandated in Law No. 21 of 2011 regarding the Financial Services Authority (“OJK Law”), supervision of Indonesia’s capital markets and non-bank financial institutions was transferred from the Capital Market and Financial Institution Supervisory Agency (“Bapepam-LK”), part of the Ministry of Finance, to the OJK as of December 31, 2012. Oversight of the banking industry was transferred from Bank Indonesia to the OJK on December 31, 2013.

We look at some of the changes that have been introduced since the OJK took over supervision of the capital markets, non-bank financial institutions and banking sectors.

A.        Regulatory Reform

Since the transfer, we note that the OJK has enacted numerous regulations for each sector. We highlight some of the most significant, as follows:

  • Banking Sector: OJK Regulation (“POJK”) No. 16/POJK.03/2013 regarding Asset Quality Assessment for Sharia Commercial Banks and Sharia Units; POJK No. 20/POJK.03/2014 regarding Rural Banks; POJK No. 21/POJK.03/2014 regarding the Obligation to Provide Minimum Capital for Sharia Commercial Banks; and POJK No. 19/POJK.03/2014 regarding Financial Services without Office within the Framework of Inclusive Finance.
  • Capital Markets Sector: POJK No. 39/POJK.04/2014 regarding Selling Agents of Mutual Fund Securities; POJK No. 32/POJK.04/2014 regarding the Planning and Implementation of the General Meeting of Shareholders of Public Companies; and POJK No. 33/POJK.04/2014 regarding Directors and Commissioners of Issuers or Public Companies.
  • Non-Bank Financial Sector: Law No. 40 of 2014 regarding Insurance; POJK No. 30/POJK.05/2014 regarding Good Corporate Governance for Financing Companies; POJK No. 28/POJK.05/2014 regarding Licensing and Institutional Financing; and POJK No. 9/POJK.05/2014 regarding the Dissolution and Liquidation of Pension Funds.

In addition to the above, the OJK and the government have enacted several regulations that apply for all of the industries supervised by the OJK. These include Government Regulation No. 11 of 2014 regarding Levies Imposed by the OJK, POJK No. 1/POJK.07/2013 regarding Consumer Protection in Financial Sectors, and POJK No. 1/POJK.07/2014 regarding Alternative Dispute Resolution in the Financial Sector.

B.        Matters to Note

1.         Judicial Review of the OJK

There has been some controversy surrounding the OJK and its supervisory powers over the various financial sectors. In particular there have been questions about the independence and constitutionality of the OJK. This was the main basis for a judicial review of the OJK Law that was sought at the Constitutional Court in the first quarter of 2014. The judicial review was filed for by activists calling themselves Tim Pembela Kedaulatan Ekonomi Bangsa, or Defenders of the Nation’s Economic Sovereignty.

Among the articles of the OJK Law being reviewed are Article 1 paragraph (1) on the definition of the OJK, particularly the term “independent”; Articles 5, 6 and 7 on the duties and functions of the OJK; Article 37 on the imposition of levies; Article 55 on the timing of the transfer of supervisory duties from Bapepam-LK and Bank Indonesia to the OJK; and Articles 64, 65 and 66 on transitional provisions for Bapepam-LK and Bank Indonesia employees, assets and duties transferred to the OJK during the early period of the OJK

In their petition, the activists asked the Constitutional Court to dissolve the OJK. This petition is still being examined by the Constitutional Court, which we note has held eight hearings on the matter to date.

2.         Imposition of Levies by the OJK

One of the biggest changes introduced by the OJK after the transfer of authority was the imposition of levies on the industries under its supervision in the form of annual levies and incidental levies for any licensing, approvals, registration authorization and review of corporate actions. Again, this has been a divisive change. Supporters say these levies will give the OJK the funding to maximize its oversight function. On the other side, there is an argument that being in a position to impose levies can compromise the independence of the OJK.

3.         Judicial Review of the Imposition of Levies

Several professional associations whose members provide support services for the capital markets, including the Association of Capital Market Legal Consultants (“HKHPM”), Indonesian Notary Association (“INI”) and Indonesian Public Accountants Association (“IAPI”), as well as individuals who work as public accountants, legal consultants and notaries in the capital markets sector, filed for a judicial review by the Supreme Court of the imposition of levies by the OJK.

That request for a judicial review was filed in the fourth quarter of 2014. The petitioners are seeking a judicial review of Article 1 point 3 and 4, Article 2, Article 3 and Article 5 of Government Regulation No. 11 of 2014 regarding the Imposition of Levies by the OJK, which stipulate licensing, registration and annual fees for capital market supporting professions. They are of the view that the imposition of levies on capital market supporting professions contradicts Article 37 of the OJK Law on the imposition of levies on any party in the financial sector. The petitioners are of the view that they cannot be deemed as parties conducting activities in the financial sector and that the OJK does not have supervisory authority over capital market supporting professions, which are regulated under separate laws and regulations and are supervised by professional associations. This judicial review petition is still being examined by the Supreme Court.

4.         Consumer Protection in the Financial Sectors

In 2013, the OJK enacted POJK No.1/POJK.07/2013 regarding Consumer Protection in Financial Sectors. This regulation was enacted to improve protection for users of financial services, including bank customers, insurance policyholders and members of pension funds. It stipulates requirements for providers of financial services, such as the provision of product information, marketing requirements, the handling of customer complaints and the requirements for standard contracts.

5.         Alternative Dispute Resolution in the Financial Sector

POJK No. 1/POJK.07/2014 regarding Alternative Dispute Resolution in the Financial Service Sector requires alternative dispute resolution agencies in the financial services sector to be registered with the OJK. In addition, financial service institutions must be a member of an alternative dispute resolution agency registered with the OJK. The list of alternative dispute resolution agencies registered with the OJK is expected to be issued sometime around April 2015.

C.        OJK Performance Review

Four years after the OJK was established, there continue to be questions about its work and performance. Perhaps the biggest issue is the imposition of levies by the OJK on the industries it supervises, as discussed above. There is also concern that the authorities of the OJK and Bank Indonesia may overlap, creating uncertainty in the licensing and supervisory functions, specifically in the banking industry. There are also concerns that the OJK may have trouble integrating former employees of Bank Indonesia and Bapepam-LK, creating bureaucratic and office culture issues.

There is uncertainty surrounding the future of the OJK, including the pending petitions for judicial reviews at the Constitutional Court and Supreme Court. However, the OJK is still new and adapting to its role as a provider of one-stop supervisory and licensing services for the financial services and banking industries, and the levies imposed by the OJK can help the body become more independent and professional.

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