On January 13, 2023, Indonesia’s President Joko Widodo signed the Law on Financial Sector Development and Strengthening (Undang-Undang tentang Pengembangan dan Penguatan Sektor Keuangan), also known as the Financial Sector Omnibus Law. This new law, intended to regulate the financial sector, comprises 27 chapters and 341 articles to replace 17 laws related to the financial sector that have been used for the past 30 years. The Financial Sector Omnibus Law will not only have implications for the overall financial sector, but also for the insurance and guarantee sector, and the cooperative sector. It is therefore important for economic development practitioners working in Indonesia to better understand this new law’s provisions and how they will affect various sectors. This article seeks to help with this task by providing an overview of the new law; a more in-depth summary of the law, developed by USAID/Indonesia’s Economic Growth Support Activity (EGSA), implemented by DevTech, can be found here.
What was the impetus for the creation of the Financial Sector Omnibus Law?
The Financial Sector Omnibus Law was drafted with the aim of addressing issues and challenges faced by Indonesia’s financial sector, including low financial deepening in comparison to other ASEAN countries (financial deepening refers to the process of increasing the level and diversity of financial services and products available in an economy); Indonesia’s limited role as a financial sector intermediary (meaning that at present Indonesia cannot be considered a major hub for financial activities that involve the transfer of funds between parties located in different geographic locations); and a lack of consumer protection in the financial sector. The new law was also passed to help promote Indonesia’s financial sector as innovative, efficient, inclusive, reliable, and stable in the face of future challenges.
What aspects of the financial sector does the law seek to reform?
The Financial Sector Omnibus Law outlines five major pillars of change to improve the performance of the financial sector, namely:
- Institutional strengthening of financial sector authorities while still taking into account the maintenance of their independence;
- Strengthening governance and increasing public trust;
- Encouraging the accumulation of long-term funds in the financial sector to support sustainable development and welfare financing;
- Enhancing consumer protection; and
- Enhancing financial sector literacy, inclusion, and innovation.
How will the Financial Sector Omnibus Law affect different sectors?
Regulations affecting the overall financial sector include:
- The prohibition by other parties of engaging in any form of interference in the implementation of the Bank of Indonesia’s (BI) duties except for in the prevention or handling of crises in the financial system or national economy;
- The prohibition of administrators and/or members of a political party from running as candidates for the BI Board of Governors, the Financial Sector Authority (FSA) Board of Commissioners, and the Deposit Insurance Corporation (DIC) Board of Commissioners;
- The establishment of FSA and DIC supervisory bodies; and
- The establishment of additional DIC functions to guarantee insurance policies, carry out bank resolutions, and resolve problems with insurance companies that have had their business licenses revoked by the FSA.
In terms of technology innovation in the financial sector, the Financial Sector Omnibus Lawmandates the transfer of management and supervision of crypto assets and derivative trading assets, such as digital gold, from the Commodity Futures Trade Supervisory Agency (Bappebti) to FSA.
The law also requires government and authority agencies in the financial sector to draft government regulations, Bank of Indonesia regulations, Financial Service Authority regulations, and Indonesia Deposit Insurance regulations within two years of the law’s signing.
The insurance and guarantee sector must now comply with the following regulation set forth by the new law:
- The establishment of a legal umbrella for mutual insurance—that is a legal framework that allows for the establishment and operation of mutual insurance companies, a type of insurance in which policyholders collectively share the risk of loss, with the premiums paid by each policyholder going into a common fund used to pay out claims;
- The obligation of insurance owners/controllers to compensate insurance and reinsurance companies in the event of losses caused by controllers; and
- Adherence to DIC as a policy guarantee agency.
Regarding the cooperatives sector, the Financial Sector Omnibus Lawmandates that FSA carry out licensing, regulation, and supervision of cooperatives operating in the financial services sector. The new law also regulates financing services businesses, bullion, the organization of funds and pension programs, and digital currencies.
For more information about the Financial Sector Omnibus Law, read the Summary of Law 4 Year 2023 on Financial Sector Development and Strengthening (P2SK) report prepared by the DevTech team implementing USAID/Indonesia’s Economic Growth Support Activity.