POJK 3/2024: The Future of Fintech in Indonesia

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Authors

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Overview

The Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) recently enacted OJK Regulation Number 3 of 2024 concerning Implementation of Technological Innovation in the Financial Sector (“OJK Reg 3/2024”) which revoked the previous OJK Regulation Number 13 of 2018 concerning Digital Financial Innovation in the Financial Services Sector (“OJK Reg 13/2018”). This regulation marks a significant milestone in the financial technology ecosystem of Indonesia.

By emphasizing responsible innovation’s potential in the financial sector while also mitigating associated risks, OJK Reg 3/2024 establishes the groundwork for an ecosystem where financial institutions and innovators can thrive, all the while ensuring regulatory compliance and protecting consumer interests. This ARMA Update examines the key provisions of OJK Reg 3/2024, shedding light on its pivotal role in shaping Indonesia’s financial technology future.

A Shift from IKD to ITSK

In the previous OJK Reg 13/2018, the terminology used for financial technology was Digital Financial Innovation (Inovasi Keuangan Digital or “IKD”). However, in the latest OJK Reg 3/2024, the term IKD has been replaced with Financial Sector Technological Innovation (Inovasi Teknologi Sektor Keuangan or “ITSK”), which refers to technology-based innovations impacting products, activities, services, and business models within the digital financial ecosystem.^[1] While the core scope remains similar to IKD, ITSK introduces expansion of its scope, which now include:^[2]

1. transaction settlement of securities;
2. capital raising;
3. investment management;
4. risk management;
5. fund raising and/or distribution;
6. market support;
7. activities related to digital financial assets, including crypto assets; and
8. other digital financial services activities.

OJK Reg 3/2024 includes activities related to digital financial assets, including crypto assets to be under the scope of ITSK and removed technology innovation related to insurance activities that was previously under the scope of IKD under OJK Reg 13/2018.

Further, in accordance with OJK Reg 3/2024, ITSK organizers encompass any parties engaged in ITSK, including Financial Services Institutions (Lembaga Jasa Keuangan or “LJK”) and other entities involved in financial sector activities under the prevailing laws and regulations.^[3] These organizers may be in the form of limited liability company and/or other legal entities.^[4] Additionally, ITSK can support economic and financial activities, including those based on sharia principles, provided they comply with sharia principles issued by authorized institutions.^[5]

Fresh Standards for the Regulatory Sandbox

The scope of Sandbox shall encompass a variety of activities and services including: (i) the granting of facilities that enable the conduct of trials within a specifically defined and limited timeframe and environment; (ii) the provision of facilities aimed at obtaining detailed explanations and clarifications regarding prevailing provisions and regulations within the financial services sector; (iii) the offering of facilities that support and facilitate the early-stage development of ITSK; and (iv) the provision of a range of additional facilities intended for the purposes of both trial and development of ITSK.^[6]

Similar to the previous regulation OJK Reg 13/2018, which introduced the regulatory sandbox for testing financial technology innovations, OJK Reg 3/2024 also establishes a regulatory sandbox for potential ITSK organizers. However, the OJK Reg 3/2024 imposes more stringent requirements to enter into the sandbox phase, with the following procedure:

Description

1. Participant Application

   To participate in the regulatory sandbox, a prospective ITSK organizer must submit an application to the OJK and comply with the requirements as stipulated in the OJK Reg 3/2024.

   Criteria for the eligibility of innovation to participate in the sandbox shall include:^[7]

• innovation which covers the scope of coverage in the financial services sector that will be utilized by consumers, partners and/or the public in Indonesia;
• innovation which is novel and/or has significant distinguishing elements from those which have been implemented in the financial sector;
• innovation that provides benefits, improves services, and provides added value to consumers, the public, and/or the financial sector ecosystem;
• innovation which is ready for trial and development;
• innovation that requires trial and development support, and which has not previously been regulated and supervised under provisions that apply in the financial sector; and
• other criteria stipulated by the OJK.

2. Sandbox Participant Approval

   Upon submission of complete documents, the OJK will review the application based on the previously submitted testing plan and criteria for innovation feasibility.^[8] If the prospective participant meets the eligibility criteria, the OJK will grant approval for participant in the sandbox. Subsequently, the participant may proceed with the sandbox process.

3. Trial and Development of the Innovation (Sandbox Process)

   During the sandbox process, participants are required to conduct trial and development activities in accordance with the testing plan submitted to the OJK.^[9] Periodic reporting on trial results is mandatory. The OJK will monitor these reports whether indirectly, directly, and/or through other monitoring methods.^[10]

   The sandbox period lasts for up to 1 (one) year from the issuance of the approval as a participant ^[11], unless otherwise determined by the OJK**^[12]** . The OJK reserves the right to halt the sandbox process midway if the innovation feasibility criteria are not met ^[13] . Participants must submit a final report at least 20 (twenty) business days before the sandbox process concludes. ^[14]

4. Final Evaluation by the OJK

   Based on the sandbox process, the OJK will conduct an evaluation and/or follow-up action, resulting in pass or fail outcome ^[15]. If the participant passes the sandbox process, the OJK will issue a pass letter to the participant with a validity period of 6 (six) months, which may be extended at the OJK’s discretion. ^[16] During the validity period of the pass letter, the successful participant must apply for a business license to the OJK and may continue to conduct limited business activities similar to those during the sandbox period. ^[17]

Introduction of Licensing for ITSK

Under the previous OJK Reg 13/2018, there was no specific licensing provision for digital financial innovations, and organizers were required to undergo a process of recording and registration with the OJK. In contrast, OJK Reg 3/2024 mandates that ITSK organizers obtain registration and/or a specific business license for each ITSK. This requirement applies not only to ITSK organizers who have successfully completed the sandbox process but also to other parties operating the same type of ITSK as the participant who has completed the sandbox process. ^[18]

The OJK may require participants who have passed the sandbox to submit a registration before applying for the business license, ^[19] and this right also applies to parties having the same type of ITSK as the passed participant. ^[20]

Once registered and/or licensed, ITSK organizers can establish cooperation with financial and non-financial institutions, under the supervision of the OJK or other relevant authorities, formalized in an agreement. ^[21]

However, further provisions regarding business licenses for each of type of ITSK have yet to be enacted and are expected to be regulated in separate OJK regulations and/or directives.

Governance of ITSK

In addition to the core regulatory provisions, there are several key provisions for the implementation of ITSK:

1. Association: The appointed association for ITSK is the Indonesian Fintech Association (“AFTECH”). ^[22] All registered and/or licensed ITSKs must be members and comply with the AFTECH’s regulations. ^[23]

2. Supervision, Evaluation, and Monitoring: All registered and/or licensed ITSK organizers are under OJK supervision ^[24] and must conduct a self-evaluation, submitting it to the OJK every 3 (three) months along with the monthly report. ^[25]

3. Reporting: Registered and/or licensed ITSK organizers must submit periodical and incidental report to the OJK. ^[26]

4. Data Centre; All registered and/or licensed ITSK organizers must have a data centre and disaster recovery facilities within the region of Republic of Indonesia. ^[27]

5. Financial Education, Consumer Protection, and Data Privacy: All registered and/or licensed ITSK organizers must promote (i) financial literacy; ^[28] (ii) implement consumer protection per OJK regulations, ^[29] (iii) protect consumer’s data and adhere to personal data protection laws. ^[30]

6. AML/CFT: All registered and/or licensed ITSK organizers must implement anti-money laundering, counter-terrorism financing, and counter-proliferation of weapon of mass in accordance with OJK regulations. ^[31]

Administrative Sanctions

Non-compliance with the OJK Reg 3/2024 by ITSK organizers, from the sandbox process to full operation after obtaining a business license, may result in administrative sanctions (e.g. written warning, consisting of written warning, temporary suspension, partial or complete cessation of activities).

Transitional Provisions

With the revocation of OJK Reg 13/2018, digital financial innovation organizers currently in the process of recordation or the regulatory sandbox process under the OJK Reg 13/2018, will receive one of the following statuses within 6 (six) months of the new regulation (by September 2024): (i) Recommended and must apply for registration or obtain a business license; (ii) recommended but not required to apply for registration or obtain a business license; or (iii) not recommended. ^[32]

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1. Article 1 point 3 of OJK Reg 3/2024. ↩︎

2. Article 2 of OJK Reg 3/2024. ↩︎

3. Article 3 (1) of OJK Reg 3/2024. ↩︎

4. Article 3 (2) of OJK Reg 3/2024. ↩︎

5. Article 5 of OJK Reg 3/2024. ↩︎

6. Article 7 of OJK Reg 3/2024. ↩︎

7. Article 10 (1) of OJK Reg 3/2024. ↩︎

8. Article 10 (2) of OJK Reg 3/2024. ↩︎

9. Article 11 (2) of OJK Reg 3/2024. ↩︎

10. Article 11 (5) and (6) of OJK Reg 3/2024. ↩︎

11. Article 13 (1) of OJK Reg 3/2024. ↩︎

12. Article 13 (2) of OJK Reg 3/2024. ↩︎

13. Article 13 (3) of OJK Reg 3/2024. ↩︎

14. Article 13 (4) of OJK Reg 3/2024. ↩︎

15. Article 14 (1) and (2) of OJK Reg 3/2024. ↩︎

16. Article 15 (1) and (3) of OJK Reg 3/2024 ↩︎

17. Article 15 (2) and (4) of OJK Reg 3/2024. ↩︎

18. Article 20 (1) of OJK Reg 3/2024. ↩︎

19. Article 16 (1) of OJK Reg 3/2024. ↩︎

20. Article 16 (3) of OJK Reg 3/2024. ↩︎

21. Article 42 of OJK Reg 3/2024. ↩︎

22. Article 50 (6) of OJK Reg 3/2024. ↩︎

23. Article 21 of OJK Reg 3/2024. ↩︎

24. Article 23 (1) of OJK Reg 3/2024. ↩︎

25. Article 26 (1) of OJK Reg 3/2024. ↩︎

26. Article 29 (1) of OJK Reg 3/2024. ↩︎

27. Article 34 of OJK Reg 3/2024. ↩︎

28. Article 36 of OJK Reg 3/2024. ↩︎

29. Article 37 of OJK Reg 3/2024. ↩︎

30. Article 38 of OJK Reg 3/2024. ↩︎

31. Article 44 of OJK Reg 3/2024. ↩︎

32. Article 50 of OJK Reg 3/2024. ↩︎

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Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.

In this article

1. Overview
2. A Shift from IKD to ITSK
3. Fresh Standards for the Regulatory Sandbox
4. Introduction of Licensing for ITSK
5. Governance of ITSK
6. Administrative Sanctions
7. Transitional Provisions

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