The Newly Ratified Law on Financial Sector Development and Strengthening

The Law on Financial Sector Development and Strengthening (Undang-Undang Pengembangan dan Penguatan Sektor Keuangan or "PPSK Law") has effectively amended provisions within 15 (fifteen) laws that apply to the financial sector1 in relation to 19 (nineteen) financial ecosystems such as capital market, banking, pension funds, insurance, etc. 2 The PPSK Law was approved by the House of Representatives on Thursday, 15 December 2022 with the following pivotal provisions (among others):

  1. Amendment to Law No. 24 of 2004 on the Indonesian Deposit Insurance Corporation (Lembaga Penjamin Simpanan or "LPS") ("LPS Law")

    The LPS Law provides the following amendments, among others:
    1. The LPS guarantees insurance companies' liquidation and the performance of insurance policies. The government has added the scope of work of LPS to: (i) protect public funds under the insurance companies; (ii) further, the function of LPS is added to (a) guarantee savings of the public funds; (b) to guarantee insurance policies; (c) carry out activities to protect financial stability; and (d) conduct resolution of bank and insurance companies, conduct resolution of banks, which shall include the activity to determine policies for banks under resolution.3 Banks under resolution shall include banks that have financial difficulties, are considered unable to carry out their business activities and are unable to be restructured by Financial Services Authority (Otoritas Jasa Keuangan or "OJK") in accordance with its authority.
    2. In addition, the LPS shall also resolve all problems of insurance companies whose licenses are revoked by OJK.
    3. To carry out its obligation, the LPS shall use funds from its assets. In the event the LPS is in a difficult position, it shall be allowed to: (i) sell its ownership over government bonds to Bank Indonesia ("BI"); (ii) carry out issuance of bonds; (iii) borrow funds from other parties; and (iv) borrow funds from the central government.4
  2. Amendment to Law No. 23 of 1999 of Bank Indonesia ("BI Law")

    Based on the BI Law, we note that BI is authorized to apply for the declaration of bankruptcy for certain financial institutions. The authorization shall covers application for a declaration of bankruptcy and/or a suspension of debt payment obligations for (i) payment service providers; (ii) payment system infrastructure providers, (iii) rupiah currency processing service providers, (iv) money market brokerage firms, (v) electronic trading platform providers (market operators), (vi) central counterparties for over-the-counter interest rate and exchange rate derivative transactions, or (vii) other institutions licensed and/or stipulated by BI, as long as the dissolution and/or bankruptcy is not regulated differently by other laws.5
  3. Amendment to Law No. 7 of 1992 on Commercial Banks ( "Banking Law"

    Based on the Banking Law, there are several amendments as stipulated below:

    1. Commercial banks shall be entitled to (i) carry out capital participation activities in financial service institutions and/or other companies that support the banking industry; (ii) carry out temporary equity participation activities outside financial institutions to overcome the consequences of credit or financing failures, with the condition that they must withdraw their participation; (iii) act as the founders or administrators of pension funds; and/or (iv) cooperate with others other than financial service institutions in the provision of financial services to customers.6
    2. To encourage digital banking, banks may provide access to customer data and information from other financial operators, including Technological Innovations within the Financial Sector (Inovasi Teknologi Sektor Keuangan or "ITSK") operators based on approval and for customer interests through certain systems or applications.7 This is to form an interlink between banks and financial technology based on the principles of transparency, interoperability, security, flexibility, consumer protection, independency, and novelty8.
    3. Commercial banks shall be entitled to operate as digital banks under the requirement of having 1 (one) physical office as the head office.9
    4. The Banking Law allows banks to purchase object of collateral/security in the event of default/default situation. If a debtor customer does not fulfill their obligations, commercial banks shall be entitled to purchase part or all of the collateral, either through or outside of an auction.10
    5. OJK regulates11 and supervises banks directly and indirectly12 and in turn, banks must comply with OJK's follow-up supervision13 and maintain their level of soundness as well as other aspects related to the level of soundness. 14
    6. The Banking Law adds criminal sanctions related to banking activities, among others: members of the board of commissioners/directors or employees of the bank who purposely falsify, eliminate, omit, or cause the failure to record, change, obscure, hide, delete, or eliminate the existence of a record either in the books and/or reports, documents or business activity reports transaction reports or bank accounts, or deliberately change, obscure, eliminate, hide or destroy bookkeeping records shall be imprisoned for 5 – 15 (five to fifteen) years and fined with IDR10,000,000,000 – IDR200,000,000,000 (ten billion to two hundred billion Rupiah).15
  4. Amendment to Law No. 21 of 2008 on Sharia Bank ("Sharia Banking Law")

    1. Banks and affiliated parties must maintain the confidentiality of information regarding depositing customers and their savings as well as investor customers and their investments. This also applies if the depositing customer/investor customer is also a recipient-of-facility customer. 16 However, bank's secrecy / confidentiality would not apply to judicial interests in civil cases, judicial interests in criminal cases, and a curator's request based on a commercial court decision, among other circumstances. 17 In these circumstances, the relevant agencies must coordinate with OJK for the release of the confidential information / bank's secrecy. 18
    2. OJK may grant banks permission to disclose confidential information for the interest of justice in criminal cases and to fulfill mutual assistance in criminal matters.19 Thus, OJK may permit the police, prosecutors, judges, or other investigators authorized by law to obtain information from the bank regarding deposits or investments of suspects, defendants, convicts, or other parties related to the bank upon the written request from certain authoritative figures and with a specific format.20 Furthermore, in civil cases, the bank's board of directors may inform the court about the customer's financial condition and other information relevant to the case based on a request of the court.21
    3. The Sharia Banking Law provides criminal sanctions for banking activities in Sharia Banks and Commercial Banks which have sharia business units. The provisions stipulates (among others) that Board of Director members and employees of sharia banks or conventional commercial banks that has sharia business units that deliberately misuse customer funds will be imprisoned for 2 – 8 (two to eight) years and fined IDR2,000,000,000 – IDR4,000,000,000 (two to four billion Rupiah).22
  5. Amendment to Law No. 8 of 1995 on Capital Market ("Capital Market Law")

    1. Parties that obtain the license, approval, statement of effectiveness of registration statements, and registration certificated from OJK must carry out their activities based on statutory provisions and by implementing good corporate governance, professional standards, and/or code of ethics.23
    2. To expand access to micro, small and medium enterprises to obtain funding from the capital market, OJK regulates the collection of public funds through a public offering of securities using the services of an electronic system operator (crowd funding securities). OJK would regulate the maximum requirements for the amount of funds raised and the requirements for investors who can use the mechanism of a public offering of securities by using the services of an electronic system operator. Crowd funding service providers facilitating these public offerings must obtain a license from OJK. 24
    3. Capital Market Law provides additional criminal sanctions in relation to capital market activities. In terms of possible criminal acts, OJK may determine not to not proceed to the pre-investigation stage or commence the pre-investigation by considering: (i) the transaction value or impact of the violation; (ii) whether there is a settlement for the loss incurred; (iii) effects on bidding activities and/or overall securities trading; and/or (iv) the impact of losses on the capital market system or interests of investors and/or the public. If OJK decides to not continue to the pre-investigation stage, OJK is authorized to enforce administrative sanctions and/or written orders.25 Furthermore, any party who intentionally prevents obstructs, directly or indirectly the examination, investigation, prosecution, and examination at court hearings against suspects and defendants or witnesses in criminal cases regulated under the Capital Market Law shall be imprisoned for 1 – 5 (one to five) years and fined with IDR1,500,000,000 – IDR50,000,000,000 (one billion five hundred million to fifty billion Rupiah).26


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Footnotes

1. Chapter XXIV Article 334 of PPSK Law

2. Chapter II Part 3 Article 4 of PPSK Law

3. Chapter III Part 3 Article 7 Number 3 of the PPSK Law (amendment of Article

4. of LPS Law) 4 Chapter III Part 3 Article 7 Number 7 the PPSK Law (addition of Article 6A to LPS Law)

5. Chapter III Part 5 Article 9 Number 21 and 22 (addition of Chapter VIB and Article 35C and Article 35D to BI Law)

6. Chapter IV Part 2 Article 14 Number 3 of PPSK Law (amendment of Article 7 of Banking Law)

7. Chapter IV Part 2 Article 14 Number 4 of PPSK Law (addition of Article 7A paragraph (2) to Banking Law)

8. Elucidation of Chapter IV Part 2 Article 14 Number 4 of PPSK Law (addition of Article 7A paragraph (2) to Banking Law)

9. Chapter IV Part 2 Article 14 Number 4 of PPSK Law (addition of Article 7B to Banking Law)

10. Chapter IV Part 2 Article 14 Number 7 of PPSK Law (amendment of Article 12A paragraph (1) of Banking Law)

11. Chapter IV Part 2 Article 14 Number 24 of PPSK Law (amendment of Article 29 paragraph (1) of Banking Law)

12. Chapter IV Part 2 Article 14 Number 24 of PPSK Law (amendment of Article 29 paragraph (2) of Banking Law)

13. Chapter IV Part 2 Article 14 Number 24 of PPSK Law (amendment of Article 29 paragraph (3) of Banking Law)

14. Chapter IV Part 2 Article 14 Number 24 of PPSK Law (amendment of Article 29 paragraph (4) of Banking Law)

15. Chapter IV Part 2 Article 14 Number 48 of PPSK Law (amendment of Article 49 paragraph (1) of Banking Law)

16. Chapter IV Part 3 Article 15 Number 17 of PPSK Law (amendment of Article 41 of UU Syariah Banking Law)

17. Chapter IV Part 3 Article 15 Number 18 of PPSK Law (addition of Article 41A to UU Syariah Banking Law)

18. Chapter IV Part 3 Article 15 Number 27 of PPSK Law (addition of Article 48A to UU Syariah Banking Law)

19. Chapter IV Part 3 Article 15 Number 18 PPSK Law (addition of Article 41B to UU Syariah Banking Law)

20. Chapter IV Part 3 Article 15 Number 20 of PPSK Law (amendment of Article 43 of UU Syariah Banking Law)

21. Chapter IV Part 3 Article 15 Number 22 of PPSK Law (amendment of Article 45 of Syariah Banking Law)

22. Chapter IV Part 3 Article 15 Number 35 of PPSK Law (amendment of Article 66 paragraph (3) of Syariah Banking Law)

23. Chapter V Part 2 Article 22 Number 3 of PPSK Law (addition of Article 5A paragraph (1) to Capital Market Law)

24. Chapter V Part 2 Article 22 Number 23 of PPSK Law (addition of Article 69A to Capital Market Law)

25. Chapter V Part 2 Article 22 Number 37 of PPSK Law (addition of Article 110A to Capital Market Law)

26. Chapter V Part 2 Article 22 Number 44 of PPSK Law (addition of Article 106C to Capital Market law)

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