OJK Reforms its Authority over Fintech Sector
An Overview of OJK Regulation No. 3 of 2024
In the past 10 years, the Indonesian market has witnessed a significant surge in technology innovation within the financial services sector—such as the rapid approval of personal loans, automated insurance claims, online-based underwriting acceptance, and digital assets (blockchain, crypto).
Consequently, Law No. 4 of 2023, governing the Development and Strengthening of the Financial Sector, mandates a stronger role for the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) in regulating and supervising technological innovation in the financial sector. This approach reflects the Indonesian government’s efforts to sustain the stability of the financial system, market integrity, and consumer protection by ensuring an integrated fintech ecosystem.
Moreover, the Indonesian government has officially adopted an activity-based approach similar to those implemented by more mature financial services regulators, such as the Monetary Authority of Singapore and the UK Financial Services Authority.
To implement this mandate, OJK has introduced OJK Regulation No. 3 of 2024 (POJK 3/2024) regarding the Operation of Technological Innovation in the Financial Sector.
Scope and mandatory requirements for operator
OJK Regulation No. 3 of 2024 (POJK 3/2024) defines technological innovation in the financial sector (the “Innovation”) as the technology-based innovation which is impacting the products, activities, services, and business models within a digital financial ecosystem.
Scope of what could/would be considered as Innovation, as set out below, was widely drafted to include “other financial services”:
- Completion of stocks transaction as part of capital raising.
- Investment management.
- Risk management.
- Fund raising or distribution.
- Market support.
- Activities related to digital financial asset such as crypto.
- Capital raising.
- Other financial services activities.
Under Reg 3/2024 (POJK 3/2024) the operator of the Innovation must implement the following principles:
- Good corporate governance.
- Risk management.
- Security and robust information system including appropriate cyber defense mechanics.
- Consumer protection and data privacy protection.
- Compliance to rules and regulations.
Sandbox environment
Similar to other financial regulators, OJK supports the sandbox environment, where regulators and operators test and learn about innovations to understand their impact on the sector.
Reg 3/2024 (POJK 3/2024) is not the first time OJK mandates operator to go into sandbox environment. It was first mandated in 2018. Sandbox is one of OJK’s approaches in regulating and supervising the Innovation in the market.
By adopting sandbox approach, OJK effectively recognize the importance of experiment/testing when dealing with technology.
Reg 3/2024 (POJK 3/2024) offers a more matured approach to the implementation of the sandbox environment and stipulates clearer steps for operators as in what to expect.
Key highlights of the sandbox requirement:
Innovation Entry Criteria for the Sandbox
- All activities considered as Innovation and introduced these following aspects must go through into the sandbox – no exception provided by Reg 3/2024:
- Innovation that can be accessed by the consumers or businesses in Indonesia.
- Innovation that contains a significantly different feature from the existing businesses in Indonesia.
- Innovation that brings benefits to the financial services sector in Indonesia or consumer in Indonesia.
- Innovation that is ready to be tested in Indonesia.
- Innovation that requires support from regulators especially where it has not been regulated or governed by the existing laws and regulations in the financial sector.
- Other aspects as determined by OJK from time to time.
Sandbox Testing Environment and Assessment Plan
- Sandbox serves as the environment where the Innovation operators can test their model in the Indonesia market as well as assess the application of the existing regulations in Indonesia financial services sector.
- All operators who enter the sandbox must submit an assessment plan to OJK which must at least include the following:
- Elaboration of the product innovation, activities/services involved, or the business model which will be tested and developed.
- Identification of the potential risks that could arise from the product innovation, activities/services involved, or the business model which will be tested and developed.
- Description of the risk mitigation plan in relation to the risks identified by the operator.
- Details of the guardrails of the experiment and Innovation development such as testing time needed, consumer profiling and target, number of targeted transactions and other measurable guardrails.
- Framework of consumer protection which will be implemented. This must, at least, include consumer complaint standard operating procedure, compensation mechanics for consumer.
- Description of the operator’s readiness of capital and resources.
- Exit policy should sandbox cannot be continued and the operator must cease its operation/experiment in the market.
- Experiment and testing scenario of the Innovation.
- Measurable green indicator of the Innovation.
Duration, Outcomes, and Compliance
- Duration of sandbox: 1 year unless determined otherwise by OJK and OJK can conclude sandbox earlier than 1 year if the operator does not meet OJK’s criteria.
- When an operator is deemed as passing the sandbox, the operator must submit the relevant licensing application within 6 months, otherwise OJK will order cease and desist.
- On the other hand, if the operator is deemed as failing the sandbox, the exit policy (that was previously submitted to OJK) must be carried out by the operator.
- Association will be formed/appointed by OJK to also supervise the implementation of sandbox.
- As part of sandbox requirement, data center and data recovery center of the operator must be located in Indonesia.
- Failure to comply with sandbox requirement could lead to administrative sanction.
- Operators who are undergoing the sandbox under the previous regulation would obtain OJK’s conclusion within 6 months from the enactment date of Reg 3/2024 i.e., by 18 August 2024.
- Any changes to the Innovation or any further development must be informed to OJK by the operator who is in the sandbox process or who have passed the sandbox.
Business impact and key takeaways
As OJK matures as the financial regulator, businesses must also consider both market entry and exit strategies. Moreover, OJK expects businesses to establish clear guardrails for market entry, making the typical agile start-up approach of “let’s enter and see how it goes” ineffective. In this context, the sandbox requirements highlight OJK’s preference for a waterfall approach, while also acknowledging the need to understand the business from a regulatory perspective and embrace the ‘start small, test, and assess’ method.
Although it’s unclear how OJK decides to pass an operator from the sandbox, we have observed financial sector businesses succeed, which indicates OJK’s commitment to an effective sandbox process rather than indefinite assessment.
Given OJK’s expectation of a certain level of maturity in the operator’s plan, early engagement with legal counsel becomes pivotal. This way, operators can gauge the full depth of regulatory requirements to meet OJK’s expectations and, consequently, ensure a smoother process in securing OJK’s support for their innovation.
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