The Paradox of the OJK
Irvan Rahardjo
Three state institutions – the Supreme Audit Agency (BPK), the Indonesia Ombudsman and the House of Representatives (DPR) – have successively kept an eye on the performance of the Financial Services Authority (OJK).
What is wrong with the OJK super body that it has so much supervision? The BPK’s Inspection Results Summary: 2017 Semester Two (IHPS II/2017 BPK) notes at least two irregularities in the appointment of the statutory manager of Bumiputera Joint Life Insurance (AJBB), for which a protracted resolution has been determined.
The OJK did not conduct a fit and proper test for the statutory managers who were appointed to restructure the oldest insurance company in Indonesia. According to the BPK, this was a violation of provisions in Law No. 40/2014 on Insurance. Article 12, Paragraph 1 states that members of the board of directors and the board of commissioners or the equivalent directors and commissioners of a legal entity that is a cooperative or joint venture must meet capability and propriety requirements.
Moreover, the appointment also violated OJK Regulation No. 41/POJK. 05/2015 on Procedures for Appointing Statutory Managers at Financial Institutions, as well as OJK Circular No. 31/SEOJK.05/2016 on Assessing Capability and Propriety of Main Parties at Non-bank Financial Institutions. The BPK judged that the appointed statutory managers did not carry out their duties properly and judged that the OJK was lax in its supervision of Bumiputera.
The legislation mandated by Law No. 40/2014 on Insurance has not been enacted fully. Law No. 40/2014, among others, mandates a policy guarantee legislation and government regulations (PPs) that regulate joint ventures. The two regulations still do not exist to date. This has resulted, among other things, in the lack of a full guarantee for policyholder rights and legal uncertainty of joint venture insurance firms. This condition derives from the fact that the legislation and PPs involve various parties and they are enacted by the DPR and the government.
Furthermore, the IHPS I/2018 BPK revealed the Supreme Audit Agency’s findings that Rp 493.91 billion in the OJK’s levy payments received for 2015-2017 had not been submitted to the state, that its levy revenues exceeded the ceiling of Rp 9.75 billion, it had paid Rp 412.31 billion in lease payments for buildings that were not utilized, and it had not paid off Rp 901.10 billion in tax debt to 31 Dec. 2017.
These problems ensued from the failure of the OJK Board of Commissioners to deposit tax revenues that exceeded the DPR-approved budget and the surplus funds from the unused OJK budget to the state treasury, as mandated in the provisions of Law No. 21/2011 on the OJK and PP No. 11/2004 on OJK taxes.
The Indonesia Ombudsman views that efforts to save the life insurance industry had slowed because the OJK officials stuttered in response to the currently defaulted policies at Bakrie Life, the AJBB and Jiwasraya (Persero). As a regulator of the finance industry, the Ombudsman deems that OJK officials should have basic standards for supervising and responding to problematic insurance companies.
The three state institutions’ findings and assessments lead us to question what is wrong with the OJK, an institution that possesses great authority to supervise the national finance industry.
Finally, it was reported that House Commission XI plans to thoroughly evaluate the OJK’s performance following the weak performance of OJK officials in supervising the financial services industry. The OJK\'s performance must be evaluated in order to minimize systemic impacts from the many problems in the finance sector, from legislation to supervision, and on up to the OJK\'s human resource issues. The three state institutions’ findings and assessments lead us to question what is wrong with the OJK, an institution that possesses great authority to supervise the national finance industry.
Weak supervision
The OJK was established on a recommendation from the International Monetary Fund (IMF), modeled after the Financial Services Authority (FSA) in the United Kingdom. The IMF wanted a financial institution that was separate from the finance ministry and the central bank and which adopted the model of the FSA. In reality, it had been deemed that the FSA had failed in fulfilling its duties and authority, especially when the UK was confronted with the 2008 global financial crisis. The FSA could not detect the financial condition of Northern Rock, a small-scale mortgage bank that placed a large portion of its funds in subprime mortgages, which had been a problem in the US.
The British government was forced to take over the bank to save it. Later, the UK restored banking supervision to the central bank from the FSA. On 19 Dec. 2012, the British government approved the Financial Services Act 2012 and on 1 April 2013, the FSA was dissolved and replaced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority under supervision of the Bank of England.
The establishment of the OJK raised lengthy pros and cons in transferring the regulation and supervision of non-bank financial institutions, which had originally been the responsibility of the Capital Market Supervisory Agency and Financial Institution (Bapepam-LK) since 31 Dec. 2012, and the regulation and supervision of the banking industry, which was transferred from Bank Indonesia to the OJK on 31 Dec. 2013 under Law No. 21/2011 on the OJK.
The OJK even faced potential judicial review at the Constitutional Court in Petition No. 25/PUU-XII/2014 that was filed by the National Economic Sovereignty Defense Team (TPKEB), which questioned the constitutionality of the OJK’s independence. Considering its integrated regulatory and supervisory function over all financial services activities, the TPKEB deemed that this could consolidate authority to create a potential moral hazard and making the OJK difficult to control.
The petitioner also postulated that the OJK’s levies on banks and the finance industry could actually reduce its independence and reverse its substantive accountability from public and consumer interests to industry interests. In the event of surplus levy revenues, the excess was to be submitted as state revenue, which in turn raised a question mark as to its nomenclature in the State Budget (APBN). The petition was rejected, but the Constitutional Court issued a partial ruling on the petition in declaring that the phrase "and free of interference from other parties" that followed the word independent did not carry binding legal force.
Other judicial reviews were petitioned in relation to the OJK’s investigative authority as stipulated in Article 1, Number 1 and Article 9, Letter c of Law No. 21/2011 on the OJK. According to the plaintiffs of
Petition No. 102/PUU-XVI/2018 – law school lecturers Yovita Arie Mangesti, Hervina Puspitosari, Bintara Sura Priambada and Ashinta Sekar Bidara – the OJK’s investigative authority contradicted the principle of due process of law as “rule of law” was defined in Article 1, Paragraph 3 of the 1945 Constitution, as well as fair legal certainty as defined in Article 28D, Paragraph 1 of the 1945 Constitution. This was because Article 6 of the Criminal Code granted the authority to investigate to police investigators and civil service investigators.
Supervising Rp 16 quadrillion in the financial industry’s assets is not an easy matter for the OJK. One reason is because its human resources supervisor has been deemed inadequate sufficient in both quantity and quality, even though the OJK has been recruiting ex-BI supervisors since the end of the BI-OJK transition period in 2015, when a few decided to return to BI. In comparison, the Monetary Authority of Singapore has around 5,000 personnel through open recruitment.
Case after case of fraudulent investments, bad loans and defaulted policy payouts and issuers illustrates the OJK\'s poor supervision. Take, for example, the cases of Primaz, Cakrabuana Sukses Indonesia, Q Net, PT Sukses Bangun Indonesia, PT Alsi Investindo Utama (2016), Bumiputera Insurance (2017), Jiwasraya Insurance, SNP Finance (2018) and Duniatex, worth a combined Rp 18.61 trillion.
Multiple paradoxes
We see that a number of paradoxes are inherent to the OJK’s existence today. First, as an independent institution that is separate from BI and the Finance Ministry and which regulates and supervises the finance industry, most of the OJK’s staffers are formerly of the central bank or the Finance Ministry. Of the OJK’s 1,800 banking supervisors, 1,075 are “on loan” from BI, and the rest come from Bapepam-LK, the Finance Ministry and OJK recruitment. Only a small number of the 1,075 BI employees who were “on loan” to the OJK eventually returned to the central bank. The OJK Board of Commissioners – both of the 2012-2017 and current terms – does not leave any room to accept commissioners from outside the bureaucracy or the banking industry.
Second, in terms of its function to provide consumer protection, the OJK does not have any commissioners who represent financial services consumers. The OJK has shown minimal regard and concern in responding to many financial services complaints from consumers. Consumers end up fighting alone without the OJK’s mediation and advocacy facilities, including cases in which the OJK has discontinued a customer’s insurance policy or declared the insurer bankrupt.
Third, the OJK is an independent institution but is financed from industry levies. This creates a conflict of interest in the OJK\'s function to protect consumers against the very financial services institutions that pay levies to the OJK.
In the view of the financial services industry, the OJK’s levies are burdensome. The levy rate is 0.045 percent of assets, whereas financial institutions’ assets are not always productive in generating income or profit. Moreover, its operating expense ratio (OER) is high, indicating its inefficiency. The OJK released in its Indonesian Banking Statistics that its OER had increased from 77.86 percent at the end of December 2018 to 87.79 percent in January 2019, compared to the average OER of around 40-60 percent among ASEAN banks. The results of a media research on the 2017 insurance balance sheet showed that the ratio of expenses (claims, business, commission) to net insurance premium revenue averaged 125.08 percent and 118.02 percent for life insurance policies.
This picture therefore illustrates that first, we must heighten supervision over the OJK. Presently, no supervisory body exists separately from the OJK\'s organizational structure that is responsible to the DPR, like the BI Supervision Agency. Second, accelerate the completion of legislation on protecting policyholders and the PP on joint venture entities. Third, with the increasingly rapid technological developments in the era of digitalization and the growing threat of cybercrimes in the financial industry, the House of Representatives and the next government must work together to develop a single-package legislation while simultaneously revising the OJK Law, the Banking Law and the BI Law to confront the systemic risks to the financial industry as a whole.
Irvan Rahardjo, Arbitrator, Indonesian Insurance Mediation and Arbitration Board (BMAI)
