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Technological Innovation in the Financial Sector (POJK 3/2024)

Financial Improvement through POJK 3/2024 Shows Effective Regulatory Reform

25 July 2024

The Issuance of the Regulation of Authority of Financial Services, Number 3 of 2024 as Improvement of the Law in Respect of Technological Innovation of the Financial Sector

The process of legal finding always follows the development and replaces outdated regulations with new ones. As regulated under Article 4 Law Number 4 of 2021 regarding the Authority of Financial Services. The Authority of Financial Services (“AFS”) is a State Institution established for the goal of ensuring that all activities of Financial Services are administered orderly, fairly, transparently, and accountably. To accomplish this goal, AFS has taken Regulative measures of administering the scope of several financial services sectors in Indonesia, one of which includes but is not limited to Financial Technology commonly known as Fintech.

Fintech is one of many of the latest phenomena resulting from development of technology, which under prevailing laws in Indonesia is known as Inovasi Teknologi Sektor Keuangan  (ITSK”) or Technological Innovation of the Financial Sector (“TIFS”). Fintech activities are one of the TIFS which are part of the scope of OJK Supervision as regulated in Article 6 of Law No. 4 of 2023 regarding the Development and Strengthening of the Financial Sector (“Law 4/2023“). Therefore, OJK as the authorized institution to supervise the financial services sector, on February 19, 2024, issued POJK no. 3 of 2024 concerning the Implementation of TIFS (“POJK 3/2024“) and officially revoked POJK no. 13 of 2018 concerning Digital Financial Innovation in the Financial Sector (“POJK 13/2018“) which was considered obsolete and inconsistent with Law 4/2023 in the field of TIFS regulation and supervision.

One of the significant changes in POJK 3/2024 from POJK 13/2018 is the use of the term ITSK/TIFS which previously used the term Inovasi keuangan Digital or Digital Financial Innovation. Furthermore, there are more specific regulations regarding the eligibility of Financial Sector Organizers as Participants of the Trial and Development of Innovation known as the Sandbox. In addition, there are other material changes to POJK 13/2018 which are as follows:

Trial Process and Development of Innovation.

The new provisions related to TIFS provide regulations that are more specific regarding the Trial Process and Development of Innovation. In the new Regulation, specifically in Article 11 paragraph (3) of POJK 2024, POJK regulates provisions related to obligations that must be fulfilled and measures that can be taken by Participants in the Trial Process. The division between obligations and actions that can be taken is as follows:

  • Obligations:
    1. notify the Financial Services Authority of any changes related to TIFS and Participants.
    2. disclose any information and/or documents related to the implementation of the Sandbox to the Financial Services Authority; and
    3. participate in any activities related to the implementation of the Sandbox.
  • Measures that can be taken related to those obligations:
    1. participate in any implementation of coordination and cooperation with authorities, ministries, institutions, and other parties related to the implementation of the Sandbox; and
    2. carry out coordination and/or cooperation with LJK and/or other parties related to the implementation of the Sandbox.

POJK 3/2018 provides absent information in respect of measures of Participants in fulfilling their obligations related with Trial Process and Development of Innovation as OJK previously only classified those two things above only as obligations.

Process of Submitting Applications for Trial Participants and Development of Innovation.

In accordance with Article 9 paragraph (5) of POJK 3/2024, the Participant Application submission process required the submission of a Testing Plan that includes the following information:

  1. Explanation of the product, activity, service, and/or business model innovation that will be tested and developed;
  2. Identification of potential risks for product, activity, service, and/or business model innovations that will be tested and developed;
  3. Risk mitigation implementation plan for potential risks as referred to in letter b;
  4. Limitations on the implementation of innovation trials and developments that include the required testing period, Consumer targets and profiles, number of Consumers, trial and development partners, number of transactions, and other measurable limitations;
  5. Consumer Protection framework that includes at least Consumer complaint services and compensation mechanisms;
  6. Readiness of capital and resources to conduct innovation trials and developments;
  7. Exit policy and transition policy if the innovation being tested and developed cannot be continued after the Sandbox;
  8. Trial and development scenarios for product, activity, service, and/or business model innovations that will be tested and developed;
  9. Key performance indicators for the trial scenario; and
  10. Innovation development as referred to in letter h.

Whereas in POJK 13/2018, the provisions related to participant application requirements are not very specific and only cover 4 (four) requirements, one of which is only a brief explanation of the idea of innovation.

Timeframe/period related to the Implementation of Trials and Development of Innovation.

The provisions related to the trial period are also clarified in the new Regulation. In POJK 13/2018, the period was only set for one (1) year. However, in POJK 3/2024, these provisions remain in effect with the exception that POJK may set a different period. Furthermore, OJK has the authority to stop the trial process and Development of Innovation before the one (1) year period if there is a discrepancy with Article 10 paragraph (1) regarding the eligibility of Sandbox participants.

Association of Financial Services Providers and Implementation of Market Discipline.

POJK 3/2018 specifically regulates the duties of the Organizer for the formation of the Organizer Association which in accordance with Article 21 paragraph (2) is tasked with setting market discipline standards which include:

  1. formulating operating rules, industry standards, and codes of ethics, according to different types of businesses.
  2. receiving and forwarding reports and receiving complaints.
  3. compiling financial statistics and monitoring risks and research on macro and micro financial issues.
  4. becoming a liaison between the Financial Services Authority and the Organizer to improve regulatory support and information exchange.
  5. establishing self-regulation mechanisms and sanctions for member violations of the rules and codes of ethics; and
  6. implementing education, training, and consumer protection as well as domestic and international cooperation.

In POJK 13/2024 there are no provisions/articles that regulate the duties of the organizer to form an Association. However, it is specifically emphasized in Article 28 paragraph (2) of POJK 3/2024 that the regulations related to the TIFS Organizer Association are determined by the Financial Services Authority. Furthermore, the explanation regarding the Association’s Monitoring duties in market discipline has different standards which include the following:

  1. ensuring compliance with the submission of Financial Services Authority reports
  2. formulating operational rules, industry standards, market behavior, and codes of ethics, based on the characteristics of TIFS Organizers;
  3. receiving and forwarding reports and receiving complaints;
  4. compiling financial statistics and monitoring risks and research on macro and micro financial issues;
  5. carrying out orders from the Financial Services Authority to TIFS Organizers to support the functions of regulation, supervision, and information dissemination;
  6. establishing an independent assessment mechanism, including a mechanism for imposing sanctions for member violations of the rules and codes of ethics;
  7. carrying out education and training;
  8. implementing Consumer Protection; and
  9. implementing domestic and international cooperation.

For the type of market discipline supervision, POJK 13/2018 seems to provide clearer regulations as the criteria related to the principles of market supervision are written explicitly. Meanwhile, in POJK 3/2024, regarding market behavior supervision, it only states that its implementation is in accordance with the provisions regarding market behavior supervision. Article 23 Paragraph (5) of POJK 3/2024 as the article that discusses this matter does not provide further information regarding the provisions or legal products in question. There is a possibility that the legal product mentioned is POJK 22 of 2023, but this cannot be ascertained given the lack of descriptiveness of POJK 3/2024.

Protection of Consumer Personal Data.

POJK 13/2018 only briefly regulates the provisions related to the Organizer’s obligation to maintain the confidentiality of all information related to Consumer Personal Data. The regulations related to this matter are further refined by POJK 3/2024 which contains provisions related to the following matters:

  • Provisions on the use of Personal data that require:
    1. consent from the User;
    2. submission of information on the limitations of the use of data and information to Consumers;
    3. submission of any changes to the purpose of data utilization to consumers; and
    4. the media and methods used in obtaining data and information guarantee confidentiality, security, and integrity.
  • Provisions on sanctions against organizers related to violations of the above limitations in the form of:
    1. written warning;
    2. temporary, partial, or complete cessation of activities including the implementation of cooperation;
    3. cancellation of approval;
    4. cancellation of registration; and/or
    5. cancellation of permits.

The development of the era and technology in this digital era is very rapid. This has penetrated all aspects including but not limited to the financial sector. Laws will by nature always be issued after the development of the times. Therefore, OJK as a regulatory institution for the financial services sector must be responsive to the development of the times and technology. Overall, it can be concluded that the issuance of POJK 3/2024 serves to perfect POJK 13/2018 which is outdated and does not comply with the implementation of Law 4/2023.

To read the article in PDF version, click here.

To download POJK 3/2024, click here.

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