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Financial Services Authority

Financial Services Authority. ( Otoritas Jasa Keuangan - OJK ) Drs. Paripurna Sugarda PHBK UGM November 7, 2002. Background. Similarity among financial service industries; bank, capital market, insurance, pension fund, and others as intermediary entity.

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Financial Services Authority

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  1. Financial Services Authority (Otoritas Jasa Keuangan-OJK) Drs. Paripurna Sugarda PHBK UGM November 7, 2002

  2. Background • Similarity among financial service industries; bank, capital market, insurance, pension fund, and others as intermediary entity. • The existence of financial conglomerate whereby bank only function as facility of other financial products provider.

  3. Objective • To maintain the growth of sound, competitive, stable, efficient, secure and fair financial services industry (Art. 7 Draft Law).

  4. Duties (Art. 8 Draft Law) • To increase and maintain public confidence in financial services sector. • To enforce the regulation of financial services sector. • To increase public awareness on financial services sector. • To protect financial services consumerinterest. • To decrease the level of financial crime.

  5. Current Financial System Structure Gov. (MOF) Central Bank Macro Prudential Regulation -monetary stability -financial stability Micro Prudential regulation Licensing, regulation, and banking supervision Banking Non Banking Financial Institution Capital Market

  6. Format of Financial System Structure Central Bank OJK LPS (Deposit Insurance Co.) Gov. Macro Prudential Regulation -monetary stability -financial stability Micro Prudential regulation Licensing, regulation, and Supervision of Financial Inst. And Capital. Market Banking Non Banking Finc. Inst. Capital Market

  7. Prerequisite of Success • Good preparation and implemented in-stages. • Coordination with interrelated institution. • Maintaining independency, integrity, and professionalism to avoid conflict of interest. • Amendment of supervisory institutions of financial institution regulation(Central Bank, Bapepam/SEC).

  8. Prerequisite of Success (continuation) • Determining the institution function as lender of the last resort. • Determining monitoring system and parameter of OJK’s performance.

  9. Positive Impacts on Banking • Synergy in the supervision of financial service products. • The existence of a ‘problem solving’ mechanism for the banking sector in one institution. • Report delivery only to one institution.

  10. Negative Impacts on Banking • During the transition era, overlapping supervision between the OJK and the central bank will potentially occur. • The transferring of the supervisory function from the Central Bank to the OJK can bring about instability, since the condition of the national banking sector is still susceptible. • The plan to account for the OJK to the President is potential to lessen the independency • Public trust to the national banking willdecrease.

  11. The Pro’s to OJK • Simplify the institutional supervisory format • Potential of ‘economies of scale’ • Lessen the inconsistency and duplication of regulation & supervision • Decrease ‘conflict of interest’ • A clear accountability

  12. The Con’s of OJK • Will become a big institution so that it will get very bureaucratic • Too powerful and too political, especially since it supervises all financial institutions • Internationally it hasn’t been proved to be more effectively and efficiently in supervising

  13. International Portrait

  14. International Portrait (continuation) • Until now there hasn’t been any agreement reached about the final institutional format • Format will be determined by ‘country specific’ • In the implementation, a ‘coordination culture’ is needed, and the intensely happened is the difficulty to combine the banking and non-banking culture.

  15. The Implementation of OJK • The Commissioner Board: • 1 person as a Head of Commissioner, and 6 persons as members. One of the members will be appointed as Head of Executive • Appointment and dismissal will be done by the President with the approval of the DPR (the Indonesian Legislative Assembly)

  16. The Implementation of OJK(continuation) • Board of Commissioner in the Transition Era • Total number: 3 persons • - 1 person as a Head of Board of Commissioners • - 1 person as Head of Executive • - 1 person as a member • 2 persons are proposed by the Minister of Finance, and 1 Governor Deputy who is appointed by the Governor of the Central Bank • Period of Function; • - 1 person appointed by the Minister of Finance: 5 years • - 1 person appointed by the Minister of Finance: 4 years • - 1 person appointed by the Governor of the Central Bank: as long as he/she functions as a member of the Board of Governors.

  17. Action Plan and Budget • Validated by the President, at the latest 1 (one) month before the fiscal year starts. • OJK announces its revenues and expenses budget through mass media 3 (three) months before the fiscal year to get public responses • OJK determines the revenue and expenses budget 2 (two) months) before the end of fiscal year

  18. Action Plan and Budget(continuation) • OJK’s revenue: periodical cost, service/activities expenses, and penalty expenses, interest or other financial sanctions to OJK. • Budget Surplus: <(Periodical cost + cost on services/OJK activities) – (expenses + unused reserves)> paid to the government as Non Tax Revenue. • Budget Deficit: Revenue deficit compared with the OJK expenses fulfilled by the government through the Minister of Finance

  19. Bookkeeping and Reporting Bookkeeping and Reporting Principles: 1. Fiscal year Calendar Year 2. Annual Report to the President and its summary is announced to public through the mass media 3. Accountability of Report audited by independent auditor

  20. SUPERVISION • COVERAGE OF SUPERVISION • Financial Service Institution • Prudential Financial Service Institution • Controller • Affiliated Parties

  21. THE CAPITAL MARKET INDUSTRY IN THE OJK

  22. SELF REGULATORY ORGANIZATIONS • Prudential Financial Service Institution • SRO is included in the category of Prudential Financial Service Institution, since it has: • to collect public’s fund • a long term responsibility • a potential to cause operational and financial failure to other financial service sector.

  23. SELF REGULATORY ORGANIZATIONS(continuation) CONTROLLING The regulation of the Controlling of SRO uses the ‘fit and proper test’ mechanism, and needs the OJK approval toward the transfer and usage of the voting rights

  24. SECURITIES COMPANIES Different with SRO, Securities Company is a Non-Prudential Financial Service Institution, except securities company that operates as an Investment Manager

  25. ISSUER OR PUBLIC COMPANY • Regulation toward issuers or public companies is divided in two categories; • Prudential financial service institution for issuers or public companies who operate in banking areas, life insurance, general insurance, and reinsurance • Non-Prudential financial service institution for issuers or public companies who operates in areas not mentioned above

  26. CAPITAL MARKET SUPPORTING PROFESSION Capital Market Supporting Profession included in the category of the Non-Prudential Financial Service Institution that has the obligation to get permission, registration, or approval from the OJK

  27. IMPACTS ON BAPEPAM

  28. IMPORTANT FACTORS • Accountability • Decisions and Policies Direction of Capital Market • Focus • Quasi Judicial Authority • Human Resource and Public Awareness • Equality of Institutions

  29. 1. Accountability • Annual Report/Activities as institution’s accountability standard • OJK is a supervising institution for a number of industrial sectors • Each sectoral is obligated to keep its accountability so that it doesn’t cause difficulties for the overall OJK’s accountability

  30. 2. Decisions and Policies Direction of Capital Market • The process of decision making is something that we must pay attention so that it doesn’t lessen the speed of decision making • Coordination in decision making carried out by the leaders with various professional backgrounds must not blur the direction of the capital market industrial policy.

  31. 3. Focus • The increasing supervising activities due to the broad industry that must be supervised • The accuracy of decision making is an important factor because of the various characteristics of the object/institutions that must be supervised (the possibility of ‘conflict of interest’)

  32. 4. Quasi Judicial Authority • The authority to dismiss a legal process toward a criminal act with many considerations, especially consideration that is related with the relevant industrial development • All institutions in the OJK (except the Bapepam) are obligated for having that authority

  33. 5. Human Resource and Public Awareness Based on other countries’ experiences, it needs plenty adequate of hard work and time in order to prepare human resource and public/industry awareness

  34. 6. Equality of Institutions • The object/industry supervised is relatively broader than other industry, because: • Capital Market is an integration between many activities that involved many people • The supervision coverage at least consist of 5 major items, i.e., supervision toward SRO, securities companies, institutions and supporting profession, issuers and public companies, and law enforcement

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