CB'S ARTICLE IN BLOOMBERG BNA - WORLD SECURITIES LAW REPORT

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CB's article in Bloomberg BNA - World Securities Law Report

New Single Regulator Created To Oversee Financial Services Sector

By Cornel B. Juniarto, of Hermawan Juniarto, Jakarta.

On June 19, 2012, Indonesia’s House of Representatives finally appointed Muliaman Darmansyah Hadad as the first head of the country’s newly established Fi- nancial Services Authority (OJK), which will be based in the Sudirman Central Business District, near the In- donesia Stock Exchange. Mr. Hadad, who earned his PhD in Business and Economics from Monash Univer- sity in Australia, started his career as a member of the general staff in the Bank of Indonesia’s Mataram Of- fice in 1986. He served as Deputy Governor of the Bank of Indonesia (Indonesia’s central bank) for the second time in 2011. He has been appointed to serve a five-year term (2012-2017) with OJK.

Mr. Hadad was selected from a pool of candidates who also included former and current officials of the Min- istry of Finance and the Capital Markets and Financial Institution Supervisory Board (known as Bapepam- LK). Mr. Hadad, who will concurrently serve as OJK’s head and as a member of its board of commissioners, will be joined by eight other commissioners with back- grounds in the regulation of Indonesia’s financial sec- tor who were selected with him. This group is expected to make OJK an institution capable of addressing the new challenges facing Indonesia’s financial services sector, while continuing the regulatory and supervisory

tasks which it will be inheriting from the Bank of Indo- nesia, Bapepam-LK (which it will be replacing) and the Ministry of Finance in a gradual transfer of authority over the coming years.

Building the OJK Team

By law, OJK’s board of commissioners is to be com- posed of a chairman, a vice-chairman, three executive heads, one member focusing on audit functions, one member focusing on education and consumer protec- tion, and two ex officio members from the Bank of In- donesia and the Ministry of Finance. The final organi- zation of the board of commissioners has yet to be de- termined, but, according to Indonesian media reports, the positions of the ex officio members have been con- firmed: Halim Alamsyah will represent the Bank of In- donesia and Anny Ratnawati will represent the Minis- try of Finance.

Beyond the board of commissioners, OJK does not yet have a formally announced organizational structure or staffing plan. Indeed, the staffing plan, and its imple- mentation, will be important to the effectiveness of OJK, because one of its authorities is to investigate fi- nancial services institutions. It is anticipated that exer- cise of this authority will involve approximately 2,500 employees acting as civil servants. A significant portion of OJK’s staffing needs is expected to be filled by em- ployees transferred from Bapepam-LK. Considering the organizational structure of Bapepam-LK, employ- ees of the Transactions and Security Bureau, the Insur- ance Bureau, and the Pension Fund Bureau are likely

candidates for transfer. Bapepam-LK employees who are not transferred to OJK are expected to be transferred to other departments within the Ministry of Finance. Addi- tionally, the Bank of Indonesia has reportedly given its employees a choice as to whether to stay in the Bank of Indonesia or move to OJK.

OJK’s Authority

OJK’s authority will be inherited from Bapepam-LK, cur- rently the capital markets regulator, and the Bank of In- donesia, which currently has regulatory authority over the banking system (both commercial banks and sharia banks), but OJK will have broader authority compared to these two institutions. Moreover, for investigations of corruption in the financial services sector, OJK’s author- ity will go beyond the powers granted to Indonesia’s Cor- ruption Eradication Commission (KPK), considered by some to be the country’s anti-corruption ‘‘superpower’’. In addition to other penalties, investigation and pros- ecution by OJK could result in license revocation, effec- tively ending the business activities of a financial services provider. OJK is also designed to act as a ‘‘one stop’’ regulatory service for both bank and non-bank financial institutions, covering the banking sector, capital mar- kets, insurance and other financial institutions.

However, despite this expanded authority, OJK is in- tended to cooperate with other government agencies, such as the Ministry of Finance and the Bank of Indone- sia. Once the authority of the Bank of Indonesia over banking regulation has been transferred to OJK by the end of 2013, the Bank of Indonesia’s main task will be to supervise the stability of the country’s monetary and payment systems.

Consumer Protection

One of the reasons for the creation of OJK is the gov- ernment’s desire to increase consumer protection in In- donesia’s financial services sector. The development of economic growth in Indonesia, along with the increas- ing number and complexity of products from financial services institutions, has led to many complaints filed by consumers. A bank mediation institution controlled by the Bank of Indonesia, known as the Department of Banking Investigation and Mediation (DIMP), was estab- lished to address these complaints. However, DIMP, which is limited to settlement through mediation be- tween a consumer and a bank over financial claims of up to 500 million rupiah (approximately U.S.$50,000), is

considered unable to resolve many consumer disputes that occur. OJK is intended to prevent losses to consum- ers, to address consumer service complaints and to make legal claims on behalf of consumers.

Consumer protection is a primary driver in financial ser- vices regulation and oversight because financial services institutions handle the funds of the general public. In almost every country which has an authority similar to OJK, consumer protection was identified as a reason for establishing the institution. This was, for example, one of the reasons for the establishment of the United King- dom’s soon-to-be-dissolved Financial Services Authority.

Investigations

OJK also has competency to conduct investigations of matters in the financial services industry. This is in- tended to follow the special investigative authority of Bapepam-LK. However, OJK has more authority in com- petency regarding investigation than Bapepam-LK, be- cause OJK has competency over all financial services, that is, banking, capital markets, insurance and others. According to Bapepam-LK’s annual report, in 2011, Bapepam-LK conducted examinations in 155 cases re- garding suspicion of violations of laws and regulations in the capital markets sector. Furthermore, Bapepam-LK also investigated 12 cases regarding suspicion of crimi- nal acts in the capital markets sector. The case load of OJK could potentially be larger.

OJK’s Budget

OJK will have its own budget funded from the state bud- get, from levies imposed on parties conducting activities in the financial services sector or from some combina- tion of the two. The option to choose a source of bud- get funding from the levies imposed on financial ser- vices institutions has created some controversy among fi- nancial analysts, who believe that this mechanism will reduce OJK’s independence. Currently, OJK’s budget, about 900 million rupiah (or some U.S.$90,000), has been funded only by the state budget. OJK’s board of commissioners may elect to implement the levy program in the future, however.

Cornel B. Juniarto is a Partner in the Jakarta-based law firm Hermawan Juniarto, where he heads the corporate and com- mercial transaction team. Hermawan Juniarto is associated with the global law firm Hogan Lovells. Cornel B. Juniarto may be contacted at cbjuniarto@hermawanjuniarto.com. 

 

Posted in News and Media on Aug 01, 2012