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Will the new financial watchdog be up to the job?
A 12-year political tussle between vested interests over the setting up of the country’s independent and powerful financial-services watchdog and regulator ended on Thursday as the House of Representatives passed a bill to set up the Financial Services Authority (OJK)
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12-year political tussle between vested interests over the setting up of the country’s independent and powerful financial-services watchdog and regulator ended on Thursday as the House of Representatives passed a bill to set up the Financial Services Authority (OJK).
The new agency will oversee 120 commercial banks and over 1,000 micro lenders, brokerage houses, insurers, multifinance firms, pension funds and other financial institutions in Southeast Asia’s largest, and rapidly expanding, economy.
The OJK will take over the supervisory function of banks from Bank Indonesia, and insurers and stock markets from the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) in the expectation of becoming a more professional and corruption-free institution.
An integration of such financial oversight is also expected to tackle the rapid development and complexity of financial products that may pose risks of fallout.
However, questions lingered as to whether the new agency would live up to the expectations, particularly as Indonesia remains among the world’s most corrupt countries.
“The OJK is a political decision. It’ll find itself in a high-risk position at a time when global financial conditions are not conducive,” said Sigit Pramono, chairman of the National Banks Association (Perbanas).
“But we’ll accept the OJK as it is, as we are not in a position to have preferences.”
The formation of the OJK is overshadowed by the catastrophic failure of such agencies to weather the impact of global financial turmoil in other parts of the world. Many doubt whether strict financial oversight and regulatory framework in the country will improve under the OJK.
Bankers, however, if not all market players, have high expectations of the agency amid lingering global economic uncertainties.
“The basic rule of thumb is not to bow to political pressure and other interests once the agency’s board of commissioners have started to work,” said Sigit.
The OJK — initially opposed by BI as it took away the central bank’s lucrative banking supervisory role — will be chaired by a nine-member board of commissioners with powerful authority, ranging from regulation and sanctions to inspection and licensing.
During the bill’s deliberation, which went through five House sessions since August 2010, composition of the board was the most heavily debated topic, with lawmakers, primarily from the Golkar and Hanura parties claiming the government’s representatives in the agency would impinge on the agency’s independence.
“There have been too many ‘temptations’ in the deliberation,” Golkar politician Nusron Wahid, the chairman of the House’s special committee on the OJK bill said.
It was finally agreed that two ex-officials from BI and Bapepam-LK would have a seat at the OJK’s board of commissioners along with seven members selected by the House from 14 candidates proposed by the President.
The deliberation was also marred by speculation last year that lawmakers had tried to extort Rp 100 billion (US$11.30 million) from BI in exchange for allowing the central bank to retain its bank supervision intact.
BI strongly opposed the bill as it wanted to hold on to the supervisory function in order to ease monetary-policy making.
The high-profile failure of Bank Century (now Bank Mutiara), however, and its controversial and unsuccessful Rp 6.7 trillion government bailout seemed to validate the need for separating monetary policy and banking regulation.
The OJK law aims to ensure the Bank Century case is not repeated as it establishes regular quarterly coordination meetings between policymakers in the financial sector to anticipate the impact of global financial crises.
It should also allow for swift decision making in times of crisis where a meeting of the Financial System Stability Coordination Forum (FKSSK) will have the highest authority in issuing any policies to help the country withstand the crisis. The forum will include the finance minister, BI governor, OJK chairman and Deposit Insurance Corporation (LPS) board of commissioners.
Should any bailout decision be taken by the forum, the House must ratify it within 24 hours at the latest, according to the law.
While the law has covered the legal infrastructure needed for policy making in times of crisis, the OJK faces another daunting task that of filling its organization’s ranks with professionals.
BI and Bapepam-LK officials are concerned about the transition process in which their careers will be on the line, as many will be made redundant after supervision of the financial sector is transferred to the OJK.
“BI employees in the banking division are awaiting clarification before making any decisions pertaining to their long-term plans and careers,” said BI spokesman Difi Johansyah.
“They need to know about the working and salary systems at the new OJK before moving on.”
The OJK will need 2,000 to 2,500 employees, of which about 1,200 are expected to be recruited from Bapepam-LK, another 800 from BI and the remainder from open recruitment, according to Golkar legislator Harry Azhar Aziz, who was involved in drafting the bill.
BI employees who transfer to the OJK will be required to work there for at least three years with a two-year probationary period allowing them to decide whether to stay or leave. The Bapepam-LK employees will have a shorter tryout period of only three months.
A survey conducted by BI Employee Association (IPEBI) last year revealed that almost 80 percent of the central bank’s staff were reluctant to move to the OJK because of career and salary uncertainties, as well as the risks of the agency’s failure.
The employee issues were among the special requests filed by BI to lawmakers during the transition period of the OJK.
“There have been special requests from BI,” Nusron said. “Seventy-five percent of the requests have
been met.”
The requests include a linked data system between BI and the OJK, voluntary employee transfers from BI to OJK and onsite inspections especially for banks with systemic impact on the economy.
BI demanded such requests following the traumatic experience of the United Kingdom. The Northern Rock crisis in the UK was partly due to a lack of data coordination between the Financial Services Authority and the Bank of England, the crisis resulted in a taxpayer bailout.
“The transition period from BI supervision to the new OJK is very crucial, especially at times like these with threats of lingering crisis. Coordination between the two agencies must be strengthened,” said Sigit Pramono, representing the bankers.
Aside from the technical issues, the OJK is also confronted with budgeting problems that may potentially taint its independence.
Under the law, in the early years after its inception, the OJK will be funded by the state budget, and in the long run by premiums collected from the financial industry.
But the premiums collection will pose a risk of the OJK being compromised by the interests of financial giants.
“How objective will the OJK be? Will it risk its independence because we pay its premiums? What about the treatment of those who pay and those who do not? I’m afraid it might expose the OJK to a form of bribery,” said Gatot Suwondo, chairman of the Indonesian Association of State-Owned Banks (Himbara).
OJK transition timetable
2011 (Oct. 27): OJK bill is passed
2011 (November): The President forms nine-member selection panel for selecting OJK board of commissioners
2012 (May): President names 21 candidates for the OJK board; the Bapepam-LK and BI name their ex-officials to be transferred to the OJK
2012 (June): Nine-member OJK board is selected by the House
2012 (July): A transitional team is formed under the coordination of the Finance Minister and BI governor
2012 (August): Organizational structure, functions, standard operating procedures (SOP) and infrastructure are established
2012 (December): Transition period for stock market, insurers, financing firms, pension funds
2013 (December): Transition period for banks
2014 (January): OJK fully operational
Other key articles in the law
- The OJK is an independent agency whose authority includes regulating, supervising, inspecting and investigating
- Financial services in banks, capital markets, insurance, pension funds, financing companies and other financial companies are under the supervision and regulation of the OJK.
- The OJK covers work that includes licensing, merger and acquisition approval, risk management, credit testing and money laundering.
- Members of the board of commissioners are prohibited from having any links with political parties, or family ties and businesses in the financial sector.
- The OJK is tasked with ensuring consumer protection.
- The OJK can sue recalcitrant financial service companies in order to claim damages on behalf of the consumer.
