31333A. Bank and Other Financial Institutions

Financial Service Authority: Watchdog or Lapdog?

Comparison between Otoritas Jasa Keuangan and Financial Service Authority of United Kingdom

By:

YULIA RATNASARI

3124039

International Business Networking

The Faculty of Business and Economics

University of Surabaya

October 2013

Supervised by:

Ir. H. Soetrisno, M.Sc., Ph.D (STN)

Dr. H. Sugeng Hariadi, S.E., M.Si. (SH)

Financial Security Authority: Watchdog or Lapdog? - 3124039

Introduction

In early reform era, transferring Bank of Indonesia (BI)’s one hand authority over banks

to an independent institution was suggested by the government under President Junus Effendi

Habibie. This idea was proposed in the draft of BI Law in 1999. However, there was no further

consideration from the Indonesia’s House of Representatives (Dewan Perwakilan Rakyat, DPR in

short). Further, economy in the world is correlated to each other regarding to the snowball and

domino effect. Evidently, world crisis in 1998, 2008 and Eurozone crisis in 2010 were affecting

Indonesia’s microeconomics and macroeconomics. Financial industry in Indonesia was predicted

to be collapsed after the Eurozone crisis. Hence, Indonesia needed to improve its authority in

supervised and took corrective action towards financial sector. On 22 November 2011, DPR

passed UU No 21 Tahun 2011 Tentang Otoritas Jasa Keuangan to reform the authority.

Financial Service Authority of Indonesia (Otoritas Jasa Keuangan, in abbreviation OJK)

is an independent Indonesian government agency that regulates and supervises the financial

services sector. The idea was adopted from Financial Regulatory Authority system in other

countries, for example: FSA of United Kingdom (FSA UK), Israel Securities Authority (ISA),

and Dubai Financial Services Authority (DFSA). However, FSA UK was appraised as a failed

watchdog to regulate the United Kingdom (UK) financial industry during financial crisis in 2008.

Since 1 April 2011, FSA UK has been being split two new agencies: the Prudential Regulation

Authority (PRA) and the Financial Conduct Authority (FCA) statutory on Financial Service Act

2012.

Pro et contra occurred during the implementation of OJK in Indonesia. Failure of

authority system in other countries, World Bank’s warning that transferring authority in the

middle of crisis can jeopardize Indonesia, and corruption issues; were the main contraventions

from the offender. Conversely, the supporters of OJK stated that it can be a solution as it has been

being suggested since President BJ Habibie era; and hopefully it is able to supervise financial

industry better. To address the issues, this paper is mainly focus to compare and contrast FSA UK

and OJK in its background, objectives, system, funds, consumer protection, and implementation.

Therefore, the effectiveness of forming OJK can be acknowledged.

Method

Using online research methods (ORMs), data was obtained. Through OJK official website

(Uniform resource locator, abbreviated URL: www.ojk.go.id) and FSA UK (URL

http://www.fsa.gov.uk), which is no longer updates as it now become two separate regulatory, the

writer got insights to the institutions’ means and objectives. Responses and critics from the

society were acquired from blogs, newspaper online and published reports.

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Results

Firstly, historical background of OJK and FSA UK is slightly similar based on dynamic

environment and an alternation from the previous agency. Initially, Capital Market Supervisory

Agency (Badan Pengawas Pasar Modal dan Lembaga Keuangan, known as Bapepam-LK) was

an institution that supervise the capital market and financial institution. While BI has one

objective to achieve and maintain Rupiah value stability. In order to pursuit the objective, BI is

supported by three pillars: 1) formulate and implement monetary policy; 2) regulate and ensure a

smooth payment system, and 3) regulate and supervise the national banking system. Because of

financial crisis, and collapsed of Bank, such as Century Bank, OJK was established. On 31

December 2012, functions of Bapepam-LK were transferred. While on 31 December 2013, BI’s

authorities over banking industry are going to be taken over. OJK is now part of Forum

Coordination in Financial Sector Stability with Ministry of Finance, BI, and Deposit Insurance

Agency (Lembaga Penjamin Simpanan - LPS). In short, OJK replaces role of both Bapepam-LK

and the third pillar of BI. Similarly, FSA UK was also a transformation from a previous

regulatory agency. The Securities and Investments Board Ltd (SIB) was formed on the June 7

1985 which was established by UK Chancellor. In 1990s, there were many scandals and

economics turbulence, and the culmination was the collapse of Barings Bank. Hence, ceasing

self-regulation of the financial services and consolidating multiple regulators were taken. On 28th

October 1997, name of SIB changed to FSA UK based on Financial Services and Markets Act

2000. FSA UK also took over Securities and Futures Authority (SFA) whose responsibility

supervised trading shares and futures.

Secondly, objectives of FSA UK and OJK are compared. Objectives of OJK are 1)

financial sector is held with accountability, equality, transparency and well-organized; 2) Able to

actualize financial system which is stable and sustain; and 3) Consumer and society protection.

Likewise, FSA UK objectives were 1) Market Confidence: maintaining confidence in the

financial system; 2) Public Awareness: promoting public understanding of the financial system;

3) Consumer Protection: securing the appropriate degree of protection for consumers; and 4)

Reduction of financial crime.

Thirdly, structure and management of OJK and FSA UK are different. The head of OJK is

board of commissioners (Dewan Komisioner - DK), which consist of nine members appointed by

the president and elected by DPR. Two members are ex-officio, a Latin term for one who is part

of it by virtue of holding another, from BI and Minister of Finance. DKs consist of chairman,

vice chairman who also Head of Ethic Committee, Head of Bank Supervisor; Head of Capital

Market Supervisor; Head of Non-Bank Supervisor; Education and Consumer Protection member;

Head of Auditory Dean and two ex-officio members. All of nine DKs are also positioned

themselves as members of DK. Seven DKs, excluding two ex-officio members, conducts 14

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deputies of Executing Operations. One DK can conduct one up to four deputies and three to six

directories are consisted in one deputy. On the other hand, FSA UK members were appointed and

removed by the Treasury. The majority of the Board members were non-executive. There was

also an ex officio member from Bank of England. The FSA UK Board consisted of a Chairman, a

Chief Operating Officer, a Chief Executive Officer, two Managing Directors and nine Non-

Executive Directors, including a lead non-executive member. Deciding on overall policy, FSA

UK focuses were divided into: Retail Markets, Wholesale and Institutional Markets, and

Regulatory Services. Those three parts were Managing Directors’ responsibility. (See Appendix

A for members and structure of OJK and FSA UK)

Fourthly OJK and FSA UK funding are different. OJK is being financed by federal budget

(Anggaran Pendapatan Belanja Negara - APBN) amounted for 1.69 trillion IDR for year 2013-

2014. Funds are being used for operational activities, training and retainers, and asset as OJK is a

new institution. In 2014, hopefully 25% funds will come from APBN and the rest will come from

industry. The target is start from 2015 OJK will be fully financed by 0.03-0.06% from each

institution’s asset. While, FSA UK was already funded entirely by fees charged to the financial

services industry. Benchmarked to Hong Kong Securities and Futures Commission (SFC), it is

taxed each industry based on its frequency and transaction types. More variety and more frequent

its service, the higher the taxes and vice versa. Conversely, Slovenia Agencija za Trg Vrednostnih

Papirjev (ATPV) funds come from service and mandatory tax. 20% of ATPV funds are imposed

to all institution which is being supervised.

Fifthly, the consumer protections are concerned in both countries. OJK statutes on Pasal 4

UU OJK Nomor 21 Tahun 2011, it protects financial services’ customers in Indonesia. Consumer

can reach FSA through written letter, email, telephone, facsimile and online to

http://konsumen.ojk.go.id. Up to 31 December 2013, OJK only handled non-Bank complaints,

while Bank still in BI authority. FSA had Financial Services Consumer Panel which described

itself as “An Independent Voice for Consumers of Financial Services”. Consumer complaints

were pooled and directed to FSA employees. However, the Consumer Panel would not address

individual complaint. (See Appendix B for reporting complaints to OJK)

Sixthly, there are mismatches between the objectives written and implementation. OJK

gains critics since the first establishment.

"OJK hanya membebani rakyat saja, berarti menjadi beban APBN juga. Padahal OJK

ingin menjadi eksekutif kelas dunia, tetapi manajemen kelas kampung," - Arif Budimanta,

member of XI DPR Commission (09/07/2013). He stated that, “OJK just gives a burden

for the society and federal budget. The motive was to be an executive in international

class; while, the reality is being slum class management.”

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"OJK melakukan kegiatan tidak bermutu tetapi terus meminta-minta biaya," XI DPR

Comission, Nusron Wahid. He said that, “OJK does unqualified activities but kept asking

for budget.”

Both of the figures criticized OJK because during their first semester up to the second

performance was not satisfying. OJK only spent 4,7% from its budget to educate; and asking

DPR to rise up their APBN portion 46% to 2,408 trillion IDR in 2014. Furthermore, they oversee

OJK activities is mainly giving seminars. While FSA was obviously assessed that it need a

reformation. World Development Movement (WDM) of UK summarized that FSA governance

model was weak and it lacked of transparency.

“FSA has failed to provide information on who it meets with, and Freedom of Information

request have been frequently denied. Where information has been disclosed, it shows that

meetings are almost exclusively with finance sector”. – WDM (June 2012). Also WDM

added that “It has not been shown to be independent of either the financial sector or

government, often representing the Treasury in key meetings in Europe”.

FSA UK split to FCA and PRA. Aims of FCA are to protect consumers, to ensure both wholesale

and retail industry stability and to promote healthy competition between financial services

providers. PRA is a part of the Bank of England which responsible to regulate and supervise

banks and non-banks prudentially. Hence, UK learned from the past mistake and split them into

better regulation system which will serve rather than destroy the society.

Discussion

Both OJK and FSA UK use “a light touch” approach that emphasized co-operation rather

than confrontation. Based on writer’s view points, FSA UK failure cannot be easily judged as a

potential downside for OJK. Indonesia can learn from FSA UK’s weaknesses in performing OJK.

Firstly, the historical background of FSA UK and OJK are similar. Initially, both were a

merger and an alternation from another or previous agency. Then, both were transformed to be an

independent supervisor that prevent or minimize the effect of upcoming crises.

Secondly, the objectives are basically the same. OJK does not state public understanding

and awareness of financial services concern. However in the implementation, OJK often holds

workshops to enhance public’s financial awareness and promote OJK’s function and existence.

Thirdly, the structures and management of OJK and FSA UK are different. DKs are

responsible to the Executive Operation by leading each deputy in OJK. Conversely, FSA UK

boards made policies and regulated the activities. Only Managing Directors were responsible to

the part of activities. Both OJK and FSA UK board of commissioners have ex-officio members.

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Another, OJK DK members are appointed by president by the election of DPR. On the other

hand, FSA UK members are chosen and removed only by Treasury.

Fourthly, OJK and FSA UK funding come from different sources. FSA UK funded

entirely from the financial industry. While as OJK is still a new agency, the target is OJK will be

funded by the APBN up to the end year 2014. The writer suggests that OJK must use its

resources optimally. Logically, taxes imposed to the financial services will be passed to the

consumers. In other words, taxes to the industry are consumer’s burden. Hence, OJK should

perform well that consumer willing to pay OJK not because of the enforcement.

Fifthly, OJK and FSA UK protect consumers and provide convenience complaint service

through many media. Up to October 6, 2013, OJK received 4,518 information about investment

fraud (in Bahasa: investasi bodong) and 556 reports. FSA UK also receiving reports, but they

more emphasize in giving instruction how to complain to the related institution, The Financial

Ombudsman Service and to the court. FSA did not handle complaints in behalf on individual.

Sixthly, OJK and FSA UK gain critics. The difference is OJK can be said as a transition

and not stable yet. On the other hand, FSA UK is already performed approximately 15 years and

evidently need a correction due to the changing environment.

Enhancing transparency, consumer concern and clarify its mean in deciding regulation are

the main concern of OJK to prevent the same failure of FSA UK. Kusumaningtuti Sandriharmy

Soetiono explained in National Seminar OJK: Roles of Educate and Protect Consumer in Lor In

Hotel, October 15 2013 that only 20% population in Indonesia aware of the legal financial

industry. Comparing to Malaysia which 66% citizens are aware, Thailand 73% and Singapore

98%; Indonesia is far away behind. Hence, investment fraud is often happen. In response, OJK

frequently gives seminars and educate the society. Indonesia has its own issue which cannot be

compared with UK’s issues. The writer suggests the society to support OJK rather than criticize

their current performance. OJK is still in transition period which need suggestion and solution of

their problems. Besides criticizing, society and bureaucrat should consolidate within Indonesian

population in enhancing their own financial awareness.

Conclusion

Since environment is dynamic, institution in a country needs to adjust legal institution in

order to be matched with this current requirement. OJK is one of the institutions that Indonesia

formed to be a watchdog of financial industry which is free from intervention. FSA UK dissolved

because it was no longer suitable with UK current economics condition. OJK, PCA, and PRA

new statutory regulations prioritize public interest, accountability, and transparency. If the plans

match with implementation in reality, the transformation will enhance the society welfare.

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Bibliography

http://ojk.go.id/App/ContentPage.aspx?Guid=78BAFBEA-00B4-4FF1-8FA2-1DF8E7D2F9EE

http://www.fsa.gov.uk/about

http://www.bapepam.go.id/

http://www.bi.go.id/web/en/Tentang+BI/Fungsi+Bank+Indonesia/Tujuan+dan+Tugas/

http://swa.co.id/portfolio/ojk-resmi-memulai-tugasnya-gantikan-bapepam-lk

http://ekbis.sindonews.com/read/2012/12/25/90/700589/kelahiran-ojk-sejarah-baru-

perekonomian-indonesia

http://www.hukumonline.com/berita/baca/lt5177c83fd2ec0/pakar-pertanyakan-status-hukum-

keuangan-ojk

http://www.wdm.org.uk/sites/default/files/FSA-watchdogorlapdog.pdf

http://en.wikipedia.org/wiki/List_of_financial_regulatory_authorities_by_country

http://en.wikipedia.org/wiki/Barings_Bank

http://www.neraca.co.id/harian/article/22035/2015.APBN.Lepas.Pendanaan.ke.OJK

http://bisnis.news.viva.co.id/news/read/369488-perbanas-kritik-iuran-pengawasan-perbankan-di-

ojk

http://www.housingcare.org/downloads/kbase/2703.pdf

http://www.neraca.co.id/harian/article/30526/Wanprestasi.Kinerja.OJK.Sangat.Rendah

http://www.solopos.com/2013/10/06/perlindungan-konsumen-ojk-terima-556-pengaduan-453896

http://www.newstatesman.com/business/business/2013/04/uk-replaces-fsa-two-new-regulatory-

authorities

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Appendix A

Structure of OJK:

Source:http://www.ojk.go.id/App/ContentPage.aspx?Guid=9AFEFF68-6A14-47BC-8A34-

6EF7BD961F30

Members of OJK:

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8

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Source: http://www.fsa.gov.uk/about/who/board

Fo rmer members of FSA UK

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Appendix B

Source:http://www.ojk.go.id/App/ContentPage.aspx?Guid=C4C27133-EA8F-4C96-A135-

9058BFC2F498

1. Written letter

Sent to :Ketua Dewan Komisioner Otoritas Jasa Keuanganu.p. Bidang Edukasi dan Perlindungan Konsumen Menara Radius Prawiro, Lantai 2Komplek Perkantoran Bank IndonesiaJl. MH. Thamrin No. 2Jakarta Pusat 10350 

2. Telephone (+621) 500 655Available from Monday to Friday on. 09.00 – 12.00 (GMT+7) and 13.00 – 16.00 (GMT+7) Not available on public holidays

 3. Faximile

(021) 386 6032 4. Email

konsumen@ojk.go.id

 5. Website Consumer ComplaintsConsumer can fill the form in: http://konsumen.ojk.go.id

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