The Financial Services Authority (OJK) has issued a regulation on a disgorgement fund to protect investors from illegal conduct as stakeholders stress the importance of proper fund management and education for retail investors.

The OJK Regulation (POJK) No. 65/2020 stipulates that the authority will force individuals, firms, associations or organized groups who have received gains through illegal or unethical business transactions in the capital market to pay the proceeds back to investors and pay penalties.

The regulation on disgorgement, which is the legally mandated repayment of gains received through ill-means imposed by courts on wrongdoers, will become effective in July. Such a protection scheme for investors has also been implemented by the Securities and Exchange Commission (SEC) in the United States.

 

“The implementation of the disgorgement fund is an effort needed to boost law enforcement efficacy and fairness in the financial market,” the OJK said in the regulation. “The disgorgement fund rules will be implemented so that those who engage in illegal conduct do not get to enjoy the profits.”

 

Read also: Market manipulation among common violations found at IDX: OJK

The OJK will impose administrative and financial sanctions on those who receive gains through illegal means and will oblige the relevant parties to pay back the proceeds within 30 days at the latest or risk an official rebuke. Those who fail to pay within a 90-day period will be forced to hand over their physical assets, including land, buildings and/or vehicles, subject to OJK approval.

The proceeds received by the OJK through disbursement will be used to compensate investors for losses, the regulation adds, but they can also be used to pay for the development of the financial markets.

The regulation comes amid a growing number of retail investors in the country as Indonesia Stock Exchange (IDX) recorded a 55.83 percent rise in the number of single investor identifications (SID) to reach 3.87 million as of Dec. 29, despite tumultuous financial markets.

 

However, a number of investors have suffered hefty losses due to illegal practices by certain market players, such as financial advisory firm PT Jouska Financial Indonesia, which faces allegations of illegal stock brokerage and investment mismanagement. Previously, state-owned insurer PT Asuransi Jiwasraya was accused of investment mismanagement and corruption as it invested a chunk of the customers’ premiums in pump-and-dump stocks.

 

Read also: OJK shuts down Jouska, two other investment firms

False trading and stock price manipulation were among the most common violations found at IDX, according to the OJK.

Although the disgorgement rules will help protect retail investors against the misuse of funds, the investors must understand that the regulation does not protect them from all investment losses, retail investors community Investor Muda founder and CEO Jason Gozali told The Jakarta Post on Jan. 7.

“The policy will not be able to fully eradicate investment risk, because legal loopholes will always exist,” he went on to say. “Thus, every policy aimed to protect retail investors must be coupled with educational measures to bolster their understanding of the capital market and protect themselves.”

 

On the other hand, analysts expect that the scheme will be complicated to implement as investment always entails risks.

 

Read also: The rise of the retail investor: A new force in Indonesia’s pandemic-hit stock market

“Although the regulation will be good for the financial market, the authorities must be able to distinguish between losses occurring from investment risks and those caused by legal violations,” Anugerah Sekuritas Indonesia fixed income analyst Ramdhan Ario Maruto told the Post.

“The courts sometimes may just not understand market risks”, leading to more transactions being considered illegal activities, he went on to say. “It is therefore crucial for the relevant authorities to be able to distinguish between investment risks and acts of rule-breaking.”