On 15 December 2022, the Indonesian Government together with the Indonesian parliament passed the bill of Financial Sector Development and Strengthening Law (“PPSK Law”), which aims to reform various laws and regulations in the financial sector. The PPSK Law became effective as of 12 January 2023 (except for certain provisions that are explicitly intended to take effect otherwise).
This is the 1st part of our newsletter on the PPSK Law, highlighting the major changes introduced by the PPSK Law on (i) the banking sector, (ii) the financial conglomerate, and (iii) the bankruptcy and suspension of payment (PKPU) of financial services institutions (Lembaga Jasa Keuangan or “LJK”).
- Banking Sector
The PPSK Law emphasizes and strengthens the legal basis for the payment system sector by banks, the operation of digital banks, the possibility of foreign banks’ representative offices to integrate into Indonesian banks or convert themselves into Indonesian banks, and the commercial banks’ obligations to (i) provide funding to micro, small and medium enterprises, and sustainable financing and (ii) implement the prudence principle and good corporate governance.
The key highlighted changes in the banking sector are as follows:
- Form of Indonesian commercial bank. The PPSK Law no longer allows commercial banks to operate in the form of a cooperative (koperasi) or a regional enterprise (perusahaan daerah). Consequently, all Indonesian commercial banks must now take the form of a limited liability company (PT).
- Mandatory disclosure of customers’ information. The PPSK Law explicitly requires banks to disclose customers’ information upon the request of a liquidator/receiver in a bankruptcy or liquidation process. This means disclosure in a bankruptcy or liquidation process takes precedence over banks’ general secrecy rules.
- Additional criminal sanctions. The PPSK Law introduces a new form of criminal sanction (in addition to imprisonment and penalties), namely mandatory compensation payment to the affected customers, for which purposes the convicted parties’ assets may be confiscated and seized.
- Financial Conglomerate
A Financial Conglomerate or a group of LJKs having affiliation through ownership and/or control (a concept first introduced in 2014), is now further regulated by the PPSK Law in the following manner:
- Expanded coverage. A Financial Conglomerate now also includes (a) other LJK companies such as guarantee institutions, P2P companies, and pension funds (compared to the previously limited coverage: only banks, insurance & reinsurance companies, financing companies, securities companies) and (b) non-LJK companies as may be determined by the OJK from time to time.
- Establishment of PIKK. The PPSK Law requires the controller of a Financial Conglomerate to establish or, subject to prior approval of OJK, appoint a holding company (Perusahaan Induk Konglomerasi Keuangan or “PIKK”) overriding the previous requirement of only nominating a “Main Entity”. In terms of its specific role, the PIKK is now charged with controlling and consolidating the Financial Conglomerate as well as being responsible for all the activities of the Financial Conglomerate. The PPSK Law, however, is not clear on the meaning of the latter, including whether the PIKK would be held responsible and liable for any fault or omission of its members. Practitioners are expecting this to be specifically regulated in future implementing regulations of the PPSK Law.
There are no specific transitional provisions in the PPSK Law on the above. It remains to be seen how the OJK will further regulate the technical implementation of the above new requirements, including (i) whether all existing Financial Conglomerates must immediately comply with the PPSK Law or whether there would be a grandfather clause or a grace period, and (ii) the status of Main Entity in all existing Financial Conglomerates.
- Bankruptcy and PKPU
The PPSK Law brings certain substantial changes to the bankruptcy and PKPU of LJKs, as briefly discussed below:
- Legal standing of bankruptcy and PKPU applicants. The PPSK Law reorganizes the legal standing of the OJK and Bank Indonesia (BI) in filing bankruptcy and PKPU petitions against an LJK. The OJK is vested with the authority to file a petition against (a) banks, (b) pension funds, (c) P2P lending companies, (d) financial instrument management agencies, and (e) trustees; while BI is vested with the authority to file a petition against (a) payment service providers (e.g., e-money issuers, credit card issuers, money transfer companies), (b) payment system infrastructure providers, and (c) Central Counterparty providing clearing services for over-the-counter Interest Rate and Exchange Rate derivative transactions.
- Preferential payments.
- In the liquidation of publicly listed companies (Tbk companies), the PPSK Law provides that public shareholders must be paid in preference to the controlling shareholders, allowing public shareholders to receive preferential payments from the Tbk company’s liquidation proceeds to the detriment of the controlling shareholders.
- In the liquidation of insurance companies, the PPSK Law now also classifies certain other parties entitled to the insurance benefits (e.g. legal heirs of the life-insurance policyholder)—in addition to the insurance policyholder and the insured party—as preferred creditors.
- Waiver of the Zero-Hour Rule. As a general rule, a bankruptcy decision takes effect retroactively to 00:00 local time of the decision date (zero-hour rule). The PPSK Law, however, waives the zero-hour rule for certain transactions of money market and foreign exchange instruments in the money market. Hence, once commenced, such transactions must be completed and are not subject to the retroactive effect of the zero-hour rule.
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