Indonesia‚ OJK Introduces New Regulation on IT-Based Co-Financing Services

Indonesia's Financial Services Authority (Otoritas Jasa Keuangan or OJK) has issued a new regulation on information technology-based co-financing services, which include peer-to-peer (P2P) lending. This new regulation seeks to improve the previous regulation on the peer-to-peer lending sector, OJK Regulation No. 77 /POJK.01/2016 regarding P2P Lending Services (OJK Reg. 77/2016), and support the growth and development of fintech-based financial service entities. At the same time, it will impose new requirements on both foreign and domestic information technology-based co-financing service companies in Indonesia.

This new regulation is OJK Regulation No. 10 of 2022 regarding Information Technology-Based Co-Financing Services (OJK Reg. 10/2022). OJK Reg. 10/2022 was issued on June 29, 2022 and became effective on July 4, 2022.

This article looks at some of the key points in OJK Reg. 10/2022 and their possible implications for information technology-based co-financing service companies.

Legal Entity to Conduct Co-Funding Activities in Indonesia 

OJK Reg. 10/2022 provides that the providers of IT-based co-financing services in Indonesia shall be classified as Other Financial Service Entities. Under the new regulation only legal entities in the form of a limited liability company can be considered a provider. Previously, cooperatives (koperasi) also were recognized.

Providers must satisfy certain prerequisites before engaging in the relevant co-funding activities, as follows:

Shareholding, Capital, and Equity Requirements

The shareholders of providers shall be limited to:

1. Indonesian individuals and/or Indonesian legal entities; or
2. Indonesian individuals and/or Indonesian legal entities together with a foreign legal entity and/or foreign individuals.

Cooperatives (koperasi) are not included among the Indonesian legal entities that can become a shareholder in a limited liability company acting as a provider of IT-based co-financing services. Further, foreign ownership, whether direct or indirect, in such a limited liability company is capped at a maximum of 85%.

Further, the provider must have at least Rp25 billion (approximately US$1.7 million at current exchange rates) issued capital during its establishment. This is a significant change from the previous regulation, which only required a minimum issued capital of Rp1 billion during the registration period and Rp2.5 billion during the licensing period. Additionally, the issued capital must be fully paid and placed in a time deposit (deposit berjangka).

Under Article 50 of OJK Reg. 10/2022, providers must have a minimum equity of Rp12.5 billion (approximately US$837,000 at current exchange rates) at all times. The fulfilment of this minimum equity requirement can be done gradually, as follows:

1. at least Rp2.5 billion for one year as of the promulgation of OJK Reg. 10/2022;
2. at least Rp7.5 billion for two years as of the promulgation of OJK Reg. 10/2022; and
3. at least Rp12.5 billion beginning as of three years from the promulgation of OJK Reg. 10/2022.

We compare the requirements under OJK Reg. 77/2016 and the newly issued OJK Reg. 10/2022:

Funding Requirements

OJK Reg. 10/2022 classifies funding into three activities, i.e., provision, management, and operation of information technology-based co-funding services. The provision of such services is further classified into two types of funding, i.e., (i) productive funding and (ii) multipurpose funding. While the maximum funding limit remains at Rp2 billion, this limit is further extended to apply not only to the funding receiver but also to the funding provider and their affiliates. However, the limit for funding providers and affiliates does not apply if they are OJK-licensed entities.

Funding providers (pemberi dana), under the previous regulation referred to as lender providers (pemberi pinjaman), consist of (i) Indonesian individuals, (ii) foreign individuals, (iii) Indonesian legal entities, (iv) foreign legal entities, (v) Indonesian business entities, (vi) foreign business entities, and/or (vii) international institutions. Fund receiver is no longer limited to individuals and legal entities but has now been extended also to include business entities.

Further, there are two agreements in the funding scheme:

• an agreement between the provider and the fund provider; and
• an agreement between the fund provider and the fund receiver.

Article 31 (2) of OJK Reg. 10/2022 further stipulates the provisions that must be included in each type of agreement in an electronic document format. The required provisions for an agreement between providers and fund providers are:

• agreement number;
• date of agreement;
• identities of the parties, i.e., the name and ID number (Nomor Induk Kependudukan) of the fund provider;
• rights and obligations of the parties;
• amount of the funding;
• economic benefit of the funding;
• amount of commission;
• tenor;
• breakdown of relevant expenses;
• provisions on fines (if any);
• use of personal data;
• mechanism for fund collection;
• risk mitigation in the event of bad funding;
• dispute settlement mechanism; and
• settlement mechanism if the provider is unable to continue its operational activities.

And the required provisions in an agreement between a fund provider and fund receiver are:

• agreement number;
• date of agreement;
• identities of the parties;
• provisions on the rights and obligations of the parties;
• amount of the funding;
• economic benefit of the funding;
• instalment value;
• tenor;
• object of guarantee (if any);
• breakdown of relevant expenses;
• provisions on fines (if any);
• use of personal data;
• dispute settlement mechanism;
• settlement mechanism if the provider is unable to continue its operational activities.

*The provisions in bold are new under OJK Reg. 10/2022.

Controlling Shareholder Requirement

OJK Reg. 10/2022 introduces a new requirement for providers to determine at least one controlling shareholder (pemegang saham pengendali). If there is more than one shareholder that meets the criteria for controlling shareholder, the provider must determine which shareholder shall be the controlling shareholder. The OJK may also determine another controlling shareholder, alongside the one determined by the provider.

Licensing and Reporting Requirements

OJK Reg. 10/2022 removes the requirement to register with the OJK. Instead, providers shall directly apply to the OJK for a license. However, the OJK further requires providers to obtain an Electronic System Provider Certificate (Tanda Daftar Penyelenggara Sistem Elektronik or TDPSE) on top of the license issued by the OJK and restricts providers to conduct any funding activity before obtaining a TDPSE. Within 30 calendar days after obtaining a TDPSE, providers must begin funding activity. Failure to obtain a TDPSE or to conduct funding within the given timeline will result in the OJK cancelling the provider's existing license.

Further, pursuant to Article 65 of OJK Reg. 10/2022, providers must submit a periodic report and incidental report to the OJK. The periodic report shall contain a (i) monthly report and (ii) annual financial report audited by a public accountant registered with the OJK.

Requirement for BOD and BOC Members

Members of a provider's Board of Directors (BOD) or Board of Commissioners (BOC) and officials one level below the BOD must obtain a competency certificate issued by a professional certification institution in the financial technology sector that is registered with the OJK. A foreign member of the BOD must be skilled in Bahasa Indonesia as evidenced by a Bahasa Indonesia certification that must be obtained within one year after their approval as a BOD member by the OJK.

Article 55 of OJK Reg. 10/2022 further provides that providers must have at least two BOD members domiciled in Indonesia, and at least half of the BOD members must have at least two years of managerial experience in a financial services institution in the field of credit or financing, risk management, and/or finance. If a provider conducts its activities based on sharia principles, half of the BOD members must have at least one year of operational experience in a sharia financial institution.

OJK Reg. 10/2022 provides that providers must have at least one BOC member and the number of BOC members cannot exceed the number of BOD members. BOC members are also required to have at least two years of financial sector experience at the managerial level.

Foreign Employee Requirements

Providers are allowed to use foreign employees, with the following limitations:

1. A foreign employee cannot be employed for more than three years for one office period and cannot be extended; and
2. Foreign employees may only be employed in the field of information technology as an expert one level below the BOD or as a consultant.

Foreign employees must also have skills in accordance with their responsibilities and must meet all the criteria as provided under Indonesian employment laws and regulations.

Fit and Proper Requirements

Pursuant to Article 22 of OJK Reg. 10/2022, the OJK obliges Primary Party candidates to obtain approval from the OJK prior to conducting any actions, tasks or functions as a Primary Party. Primary Parties consist of:

1. controlling shareholders;
2. members of the BOD;
3. members of the BOC, and
4. members of the Sharia Supervisory Board.

To obtain this OJK approval, Primary Party candidate must first pass a fit and proper test administered by the OJK. The test will be conducted by the OJK in accordance with OJK Regulation No. 27/POJK.03/2016 regarding Fit and Proper Test for the Primary Parties of a Financial Services Institution.

Electronic System Requirements

Under Article 42 of OJK Reg. 10/2022, providers must use an electronic system to conduct their activities and this electronic system must be owned, under the possession of, and controlled by the provider. In the elucidation, OJK Reg. 10/2022 states that "owned, under the possession of and controlled by the provider" means the provider has the ability to develop, change, and delete such electronic system.

Providers are not allowed to have more than one electronic system in each type of gadget or more than one site address in conducting their activities.

Additionally, providers must submit funding transaction data to the OJK\'s fintech lending data center by integrating the electronic system owned by the provider with the OJK\'s fintech lending data center.

Risk Management and Internal Audit Obligations

OJK Reg. 10/2022 further obliges providers to implement effective risk management measures, which must at least include:

1. active supervision from the BOD, BOC, and Sharia Supervisory Board;
2. adequate risk management procedures and risk limit stipulation;
3. adequate identification, measurement, control, and risk monitoring processes, along with an adequate risk management information system; and
4. thorough internal controls.

Pursuant to Article 58 of OJK Reg. 10/2022, providers must have an internal audit unit operated by at least one person who is skilled and/or has a background in auditing. An internal audit must be carried out by providers at least once a year and the internal audit unit shall be directly responsible to the president director.

Accounts Requirement

OJK Reg. 10/2022 requires providers to use an (i) escrow account and (ii) virtual account or payment gateway for information technology-based co-funding services. In relation thereto, providers must provide a virtual account or payment gateway for each user. For funding and the repayment of funding, the user will make payment through a virtual account or payment gateway to the escrow account of the provider to be further forwarded to each user.

Transitional Provision 

Pursuant to Article 113 of OJK Reg. 10/2022, the requirement on issued capital does not apply to providers that (i) obtained a license, (ii) were in the process of obtaining a license, or (iii) returned their certificate of registration and will re-apply for a license before the promulgation of OJK Reg. 10/2022. This exception only applies for a maximum of six months as of the promulgation of OJK Reg. 10/2022 for providers in the process of obtaining a license or providers re-applying for a license after returning their certificate of registration.

Specifically for providers re-applying for a license, the above exception only applies if the provider is not changing its controlling shareholder and has minimum equity of at least Rp2.5 billion.

Within one year as of the promulgation of OJK Reg. 10/2022, providers must meet the requirement on the minimum number of BOD and BOC members, and the requirement on certificate of competence. The same timeline applies for the fulfilment of the electronic system requirements as well as for the requirement of Main Parties to pass a fit and proper test conducted by the OJK.

Some of the provisions of OJK Reg. 77/2016 remain applicable as long as they do not contradict the provisions of OJK Reg. 10/2022. The contradicting provisions are revoked.

Conclusion

OJK Reg. 10/2022 expands the scope of regulation not only for the P2P lending sector but for information technology-based co-funding activities in general, which includes factoring. As promised by the OJK, the new OJK regulation introduces stricter requirements. Some of the new requirements are also noticeably more specific and more thorough compared to those under the previous regulation, OJK Reg. 77/2016. With the process for implementing and fulfilling certain requirements remains unclear, investors and business players in the co-funding sector should be on the lookout for further implementing regulations and clarifications from the OJK.

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