A. INTRODUCTION
The enactment of Law No. 4 of 2023 on Financial Sector Development and Reinforcement (also known as “P2SK Law”) by the Indonesian House of Representatives (Dewan Perwakilan Rakyat or “DPR”) on 12 January 2023 marks a significant milestone for Indonesia’s financial sector. The P2SK Law is aimed at developing and reinforcing Indonesia’s financial sector and introducing breakthrough reforms to address the effects of the global pandemic, economic downturn, and digitalization of transactions.
The P2SK Law has 341 articles that are divided into 27 chapters, which not only stipulate new provisions, but also amend and revoke certain or all provisions of the 18 laws that are affected by its enactment. These include laws relating to banking, capital market, non-bank financial institutions, financial technology, and digital financial assets. The P2SK Law also aims to develop consumer protection regulations, macro-prudential supervision, and legal innovation, and is expected to increase transparency and accountability for financial institutions by introducing new disclosure requirements for financial institutions and a mechanism for the government to monitor and oversee the activities of financial institutions. The P2SK Law also reconfigures the supervisory powers among different regulatory bodies, such as the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) and Central Bank of Indonesia (“Bank Indonesia”).
While the envisaged goals of the P2SK Law are commendable, their implementation is expected to be challenging. In this newsletter, our top-ranked team at Makes & Partners aims to provide you with valuable updates on the P2SK Law that might affect your fintech, M&A, capital markets, and/or banking & finance transactions.
As “go-to counsels for transactions”, who can “explain fully in the eyes of business”, Makes & Partners are lawyers who know that “solving a legal problem means more than just knowing the law”. In this newsletter, we will summarize for you the general issues, changes, and opportunities presented by the P2SK Law, and the possible challenges in its implementation. We will also provide you with an overview of laws that will be affected by the P2SK Law. We hope that this newsletter will serve as a valuable and practical source of information for your businesses and transactions.
B. TAKE-AWAY FROM THE P2SK LAW
Some important take-away with regard to the implementation of the P2SK Law are as follows:
a. Some of the provisions of the P2SK Law are subject to implementing regulations that have to be enacted within 2 (two) years from the enactment of the P2SK Law.
b. There are changes of authority in certain sectors.
c. Business actors in the financial sector may need to adjust their business activities in accordance with the new provisions of the P2SK Law.
C. MATERIAL CHANGES BASED ON THE P2SK LAW
Set forth below are some material changes based on the P2SK Law that are likely to impact your business or transactions:
BANKING
Affiliated Parties: The P2SK Law extends the definition of “Affiliated Parties” in the banking sector.
Commercial Bank and Main Party of the Banks: Commercial banks can only be in the form of a limited liability company and require the OJK’s approval for the appointment of the main party of a bank.
Merger, Acquisition, Consolidation and Spin-off: Any Merger, Acquisition, Consolidation, and Spin-off of a bank shall be conducted according to the relevant laws and regulations, and are required to obtain the permission from the OJK.
Business Activities of a Commercial Bank: Payment system activity (aktivitas di bidang sistem pembayaran) is added as a new business activity of a commercial bank. The P2SK Law now also allows cooperation of a commercial bank with other Financial Institutions (Lembaga Jasa Keuangan).
Digital Banking: The P2SK Law sets the provisions on the use of information technology for a commercial bank to operate as a Digital Bank and share the customer data and information to other financial operators based on the approval from and for the benefit of the customer.
Capital Adequacy Ratio of a Bank: Banks must fulfill their minimum capital adequacy ratio (rasio kecukupan modal minimum) according to their risk profile and form additional capital (tambahan modal), including capital conservation (tambahan modal sebagai penyangga), countercyclical buffer (tambahan modal apabila terjadi kondisi pertumbuhan kredit yang berlebihan) and capital surcharge for systemic banks (tambahan modal untuk bank sistemik).
Purchase of Collateral Assets by a Commercial Bank: A commercial bank can purchase collateral assets if a customer fails to fulfil its obligations to the bank, but the bank must promptly resell the assets, ensure that there are no ownership issues over such assets, and return any excess proceeds from the sale to the customer. Further details on the mechanism and implementation will be subject to the issuance of the relevant OJK Regulation.
The Authority of OJK over Banks: The P2SK Law grants the OJK the authority to supervise banks and may assign other parties to conduct certain tasks related to the replacement of management duties, inspections, and risk assessment. The OJK can also instruct banks to take necessary actions to address difficulties that may jeopardize their business.
Responsible Party for Criminal Acts in the Banking Sector: The responsible party for criminal activities in the banking sector has been extended into “any party”, which could be any legal entity or individual, and is not limited to the Board of Directors (“BOD”), Board of Commissioners (“BOC”) or employees of the Bank.
CAPITAL MARKETS
Definitions in Capital Market: The P2SK Law amends several provisions of Law No. 8 of 1995 on Capital Market (“Capital Market Law”), including the amendments to the definitions of affiliation, stock exchange, securities, custodian, registration statement, prospectus, and rating agency. The P2SK Law also provides a detailed definition of “affiliation”, which is more comprehensive than the definition used in the Capital Market Law and other OJK regulations.
Amendment of References to Bapepam-LK to the OJK: The reference to Bapepam-LK in the Capital Market Law has been amended to the OJK, reflecting the shift of responsibilities from Bapepam-LK to the OJK as the regulator and supervisor of the financial services sector.
Securities Crowdfunding: Under the supervision of the OJK, Micro, Small and Medium Enterprises are now able to obtain funding from the capital market, with collection of public funds through offering securities using the services of a system operator electronics (securities crowd funding).
Technical Changes in connection with the Capital Market Transactions: The P2SK Law supersedes certain technical requirements under the Capital Market Law, such as the effective date of registration statements, exceptions to public offering, and announcement of material events.
Carbon Exchange: The OJK now has the authority to regulate trading of secondary instruments relating to the economic value of carbon in the carbon market.
Changes in Fines and Criminal Provisions: Various changes are made to the administrative fines and criminal provisions in the Capital Market Law which now include the minimum and maximum fines and prison sentence imposed, where previously the Capital Market Law only regulated the maximum amount and period.
Mutual Fund: Mutual funds (reksa dana) can now borrow, and/or lend money, and purchase shares or participation units of another mutual fund, with certain requirements from the OJK. Further implementing OJK regulation will be issued to regulate further regarding restrictions on mutual fund investment.
Una Via Principle: The OJK may choose not to proceed with an investigation or commence an investigative action against alleged criminal actions on the rationale that not all violations need to be investigated as doing so may hinder the offering and/or trading of securities. If the OJK has decided not to proceed with an investigation, it has the right to issue administrative sanctions either in the form of penalties and/or written orders, including to order the perpetrator to return the losses of the investor.
Disgorgement Fund: If the OJK imposes administrative sanctions on individuals or entities for engaging in criminal activities in the capital market, it is authorized to order the return of any assets or profits obtained through illegal means to compensate investors for losses and/or for capital market development.
FINANCIAL TECHNOLOGY (FINTECH)
Tradable Commodities: The P2SK Law excludes securities, (efek), Money Market instruments, (instrumen Pasar Uang), and Foreign Exchange markets (Pasar Valuta Asing), as commodities that can be subjects of Futures Contracts (Kontrak Berjangka), Sharia Derivative Contracts (Kontrak Derivatif Syariah) and/or other Derivative Contracts (Kontrak Derivatif lainnya).
Change of Authority in Crypto Sector: The jurisdiction over digital financial assets (including crypto assets), which was previously under the authority of the Commodity Futures Trading Regulatory Agency (Badan Pengawas Perdagangan Berjangka Komoditi or “BAPPEBTI”) for regulation and supervision, has been transferred to the OJK.
Technology Innovation in the Financial Sector (Inovasi Teknologi Sektor Keuangan or “ITSK”): The P2SK Law regulates ITSK (essentially the legal term for ‘Fintech’), which includes, among others, activities related to digital financial assets (which includes crypto assets) and other digital financial services activities.
ITSK will be under the regulation and supervision of Bank Indonesia and the OJK. The scope of authorities related to the ITSK includes the provision of space and/or facilitation of trials/innovation development (sandbox), licensing, monitoring and evaluation, financial education, consumer protection, consumer personal data protection, institutional aspects, and other activities in support of the ITSK implementation.
BANK INDONESIA
Monetary Policy: In relation to the implementation of monetary policy, Bank Indonesia is authorized to manage interest rates, exchange rates, liquidity, foreign exchange activities, foreign exchange reserves, regulate and supervise money and foreign exchange markets and implement other monetary policies.
Foreign Exchange Activities: The P2SK Law has added further provisions under Bank Indonesia Law on foreign exchange traffic, which states that Bank Indonesia has the ability to regulate further requirements on: (i) foreign exchange activities reports and management of capital-related risks; and (ii) receipt and/or use of foreign exchange by residents, in order to resolve macroeconomic and financial system stability issues.
Change of Authority in the Banking Sector: The authority to issue the regulations, grant and revoke any licenses in respect of banks and their business activities, supervise and impose any sanctions over banks would no longer be conducted by the Bank Indonesia and has been assigned to the OJK.
OJK
Information Technology-Based Co-Funding Provider Services: The P2SK Law has expanded the definition of “Other Financial Services Institutions” to include Information Technology-Based Co-Funding Provider Services (Penyelenggara Layanan Pendanaan Bersama Berbasis Teknologi Informasi).
Regulatory and Supervisory Duties: OJK's regulatory and supervisory duties have been expanded to include venture capital companies, microfinance institutions, ITSK, digital financial assets, and crypto assets. Additional authorities have also been provided to the OJK, such as giving orders for merger or consolidation, exemption of disclosure requirements, and data provision for handling domestic economic problems.
Request for Bankruptcy Stipulation and Postponement of Debt Payment Obligations: The P2SK Law has set out the authority of the OJK relating to the request for a bankruptcy judgment. The OJK is now the only authorized party to submit a request for bankruptcy and/or request for suspension of debt payment obligations (Penundaan Kewajiban Pembayaran Utang or “PKPU”) to Financial Services Institutions or Other Financial Services Institutions who are registered and supervised by the OJK.
BOC: The OJK’s BOC has been expanded from 9 to 11, with new positions for Chief Executive of Financing Institutions, Venture Capital Companies, Microfinance Institutions, and Other Financial Services Institutions Supervisory, and Chief Executive of ITSK, Digital Financial Assets, and Crypto Assets Supervisory.
Supervision Body of the OJK: The P2SK Law has formed the Supervision Body of the OJK, consisting of at least 5 members, to assist the DPR in supervising the OJK's performance, accountability, independency, transparency, and credibility through evaluation, monitoring, and preparing performance reports.
CURRENCY
Introduction of the Digital Rupiah: The P2SK Law introduces the “Digital Rupiah” as a lawful currency of the Republic Indonesia, which will be managed by Bank Indonesia in collaboration with the Indonesian government. This collaboration will involve information exchange, including projections for the issuance of the Digital Rupiah, as well as the mechanism and intended use cases of the Digital Rupiah.
SPECIAL PURPOSE VEHICLE (“SPV”) AND TRUSTEE
The P2SK Law acknowledges the existence of the SPV and Trustee, which are special business entities formed to carry out securitization activities and/or carry out trust fund management activities which include activities of (i) receiving safekeeping and management of assets based on a written agreement for the benefit of the beneficiary and/or (ii) carry out securitization which includes receiving the transfer of financial assets from creditors/original asset owners and issuing securitized securities to investors (beneficiaries).
INSURANCE
Expansion of Scope for General Insurance Business: General insurance business (Conventional and Sharia-based) may expand its business to also include (a) provision of benefits related to credit/financing activities between creditors and debtors; (b) suretyship; and (c) insuring legal liability of third-party(ies).
Use of Electronic Documents: The P2SK Law recognizes the use of electronic documents in the insurance business as a valid document.
Liability of Controlling Party of an Insurance Company: The controlling party of an insurance company shall now be held liable for (i) their own actions, (ii) other parties’ actions under the Controller’s influence, and/or (iii) other parties under their control. Previously, Law No. 40 of 2014 (“Insurance Law”) only sets out the liabilities of Controlling Party for actions carried out by other parties under their control.
Prohibition from Obtaining Personal Gain: The controlling party, shareholders, members of the BOD and BOC, in a legal entity in the form of a cooperative or mutual business (usaha bersama) along with its employees and/or other parties are prohibited from soliciting or receiving, authorizing or agreeing to receive without rights any compensation, commissions, services, money or valuable goods, for its/his/her personal gain or for the profit of their respective family, in order to obtain services, to acquire business, to place investments, and/or to disburse claims from an insurance company.
Prohibition from Embezzlement: Any party is prohibited from embezzling wealth owned and/or managed by an insurance company by way of assigning, guaranteeing, pledging, utilizing, or performing other such acts that are detrimental to an insurance company. The term “Party” means individuals, corporations or business in the form of legal entity or other forms of entity, and it does not only include the shareholders or management of the insurance company.
Involvement of Third Party in Cooperation with Insurance-Business Company: The P2SK Law allows the insured party to make premium or contribution payments through a third-party which has a cooperation agreement with the insurance company.
Separation of Sharia Insurance Unit:
Previously, the Insurance Law provides that an insurance company with a sharia unit should separate the unit into Sharia-based insurance company or Sharia-based reinsurance company, within 10 (ten) years from the enactment of the Insurance Law. Under the P2SK Law, the obligation for insurance companies to separate its sharia unit applies after the OJK requirements have been fulfilled. In any case, the OJK may request for the separation of the sharia unit for insurance consolidation.
For more details, please read the document below
The New P2SK Law: A Breakthrough For Indonesia’s Financial Sector
Best regards,
Makes Team