Legal Alert: Digital Financial Innovation Regulation – New Era of a Dynamic Digital Economy

/ / 2019, Legal News, Legal News 2019

Author: Randy Hendrika, I Ketut Dharma Putra Yoga

In order to support innovations in the financial technology sector at its current expeditious pace, the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) has implemented a ground-breaking regulatory policy through OJK Regulation No. 13/POJK.02/2018 concerning Digital Financial Innovation in the Financial Services Sector (“OJK Regulation 13/2018”). This long-awaited regulation aims to provide a regulatory corridor for innovative business activities, which renew business processes, business models and financial instruments in such a way that adds value to the financial services sector and involves the digital ecosystem (“IKD”).

Below are highlights and recent developments following its implementation.

The scope of IKD itself is rather broad, and may be derived from any of the following fields:

a. transaction settlement;
b. capital accumulation (i.e. equity crowdfunding, virtual exchange, etc.);
c. investment management (i.e. advanced algorithm, cloud computing,
etc.);
d. collection and distribution of funds (i.e. virtual technologies, etc.);
e. insurance (i.e. securitization, hedge fund, etc.);
f.  market support (i.e. artificial intelligence/machine learning, big data,
etc.);
g. other digital financial support (i.e. e-waqf,robo advise and credit
scoring); and/or
h. other financial services activities (i.e. invoice trading,blockchain, etc.).

The OJK Regulation 13/2018 does not provide strict qualification for IKD activities. Such activities are loosely required to demonstrate certain qualities, such as innovation, utilization of information and communication technology, and integration with existing financial services.

Regarding the implementation of IKD, OJK Regulation 13/2018 indicates IKD providers consist of: (i) Financial Services Institutions, and/or (ii) Other parties conducting activities in the financial services sector, which must be as a limited liability company or cooperative and not allowed to manage portfolios or exposure. OJK Regulation 13/2018 stipulates the IKD activities are regulated under the following 3 (three) major points:

APPLICATION FOR ENROLLMENT

Other than registered business entities or business entities that have
obtained a license from OJK, IKD providers that will conduct or have
carried out activities within the scope of IKD must submit an
application to the OJK, which will be recorded. The OJK would, in turn,
assess whether the business activities constitute IKD activities within
the financial services field, utilize information technology during
business operations and have not been regulated by other applicable
laws and regulations.

In the event the proposed business activities are considered as IKD,
the OJK may cluster business entities with similar IKD activities
together and conduct a cumulative registration. To date, the OJK has
yet to register its first batch of IKD entities.

During this phase, IKD providers may also propose for the OJK to
apply certain exceptions from various applicable OJK regulations.
Subject to OJK approval, these exceptions may be implemented
throughout the regulatory sandbox period.

          REGULATORY SANDBOX

Following completion of the enrollment process, IKD providers may
conduct IKD-related activities within their operations and enter into a
regulatory sandbox period, which has a term of one (1) year and may
be extended for another term of six (6) months. While IKD providers
are within the regulatory sandbox phase, OJK may supervise and
assess the business activities of IKD providers, both individually and
collectively.

          REGISTRATION

Subsequent to the regulatory sandbox period, OJK may issue the
results of its assessment for a specific IKD activity with one of the
following three (3) statuses: (i) not recommended; (ii) revision; or
(iii) recommended.

In the event certain IKD activities fail to demonstrate adequate
compliance with applicable laws and regulations, the OJK may issue a
‘not-recommended’ status. Such IKD providers would not be able to
submit the same IKD activities for the regulatory sandbox period; and
it would then be removed from the OJK’s records.

Alternatively, IKD providers could be given a ‘revision status’. When
issued this type of status, IKD providers are granted a maximum
period of 6 (six) months as an extension of the regulatory sandbox
period, starting from the date ofstipulation of such status for revision
purposes. To streamline this aspect of the process, the OJK will
provide guidance surrounding improvements for IKD activities.

Next, IKD providers could be given a ‘recommended status’. In
moving forward with this type of status, the recommended IKD
providers must submit a registration application to the OJK within a
maximum period of 6 (six) months after the issuance of such
recommended status. OJK may then issue a Certificate of Registration
(Surat Tanda Bukti Terdaftar – “STBT”).

It is notable that the above process is only applicable to new IKD activities. The OJK may, under its sole discretion, provide the STBT to certain IKD providers, which did not participate in the regulatory sandbox, provided that their IKD activities have substantial similarities with previously tested IKD activities that were also recommended through the regulatory sandbox.

Considering that this regulation was only enacted recently and (to date) the first batch of regulatory sandbox has yet to be launched, its implementation may be subject to further development. Notwithstanding the foregoing, considering the immediate benefits of the regulatory sandbox, OJK Regulation 13/2018 provides new and interesting opportunities for IKD providers to seize and utilize in order to accelerate development.

 

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