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International Law

Hamud M. Balfas on the Financial Services Authority Law and Its Impact on the Distribution of Financial Products in Indonesia

by Hamud M. Balfas


On 22 November 2011, Indonesian President Susilo Bambang Yudoyono finally signed the Financial Services Authority bill (Otoritas Jasa Keuangan, or the OJK), enacting Law No. 21/2011 (Law 21). Law 21 was enacted to implement Law No. 23/1999 (as amended) (Law 23), regarding the central bank, Bank Indonesia. Law 23 granted the government a mandate to establish an agency for the supervision of the country's financial industry.

The "Super-Body's" Role

The establishment of the OJK agency was delayed several times from its initial scheduled date of 31 December 2002. Those delays were due to various reasons, including Bank Indonesia's reluctance to give up its banking supervisory and regulating power. The OJK will not only establish this new "super-body" with financial supervisory and regulatory power, but will also change the financial product regulatory landscape in Indonesia. As such, the new law materially reduces Bank Indonesia's powers, leaving it only with only the task of "achieving and maintaining a stable value of the rupiah."

The new institution that Law 21 will create regulates and supervises the assets of the financial industry. These currently stand at more than 7000 trillion Rupiah (about 750 billion USD), comprising banking assets, market capitalization of the companies listed in the Indonesian Stock Exchange (IDX), and assets of the mutual fund industry. These further include other assets managed by insurance and finance companies, pension funds, and by more than one hundred securities companies and investors. This enormous amount of assets under the OJK's supervision has made experts refer to the OJK as a "super-body." This super-body is responsible for the most important Indonesian industry in an era of worldwide financial turbulence and increasing financial product complexity.

Law 21's elucidation states that "the financial system globalization outbreak and rapid advances in information technology and financial innovations have contributed to the complex and dynamic financial system that is interrelated among the financial subsectors in terms of the products as well as the entities. In addition, the existence of financial services institutions with a proprietary relationship in various financial subsectors (conglomeration) has contributed to the complexity of the transactions and interactions amongst the financial institutions within the financial system." [footnote omitted]

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Hamud M. Balfas is a lawyer with Ali Budiardjo Nugroho Reksodiputro. Mr. Balfas writes in both English and Indonesian on various legal topics, including his book titled Indonesian Capital Market (Hukum Pasar Modal Indonesia), now in its second edition.