To further implement Article 216 of Law No. 4 of 2023 on the Development and Strengthening of the Financial Sector (P2SK Law), the Financial Services Authority (OJK) has issued an OJK Regulation No. 3 of 2024 on the implementation of innovation of Technology in the Financial Sector (POJK 3/2024). POJK 3/2024 became effective on 16 February 2024 and has revoked the previous OJK Regulation on Digital Financial Innovations within the Financial Services Sector (OJK Regulation No. 13/POJK.02.2018).
POJK 3/2024 contains 19 Sections that are further elaborated into 52 articles. Several sections worth noting under POJK 3/2024 are (i) the implementation of innovation of Technology in the Financial Sector (ITSK), (ii) Sandbox; (iii) the supervision, evaluation and monitoring by the OJK; and (iv) various obligations of the ITSK Organizer (Penyelenggara ITSK).
The Implementation of ITSK
The parties that are allowed to organize an ITSK consist of (i) financial services institutions (LJK) and/or (ii) other parties that conduct activity in the financial sector under the prevailing laws and regulations (together, ITSK Organizer). ITSK Organizer must be in the form of a limited liability company or other legal entities under the prevailing laws and regulations. Further, an ITSK organizer must first obtain the required license as governed by the OJK before it can start its operation.
As mandated by the P2SK Law, OJK has the authority over the ITSK Organizer, which includes the authority to (i) the provision of space and/or test facilities for testing/development of the innovation (sandbox); (ii) licensing; (iii) monitoring and evaluation; (iv) financial education; (v) consumer protection; (vi) protection of consumer personal data; (vii) institutional aspect; and (viii) the implementation of ITSK, including activities that are carried out by third parties that support the implementation of ITSK
Sandbox
Rapid technology development resulted in the emergence of various and complex business models, including the business models in the financial sector. As the financial sector is deemed crucial since it involves the public’s money and interests, a special regulation is needed to govern those businesses. Since 2018, the OJK has introduced a concept called sandbox mechanism (as regulated under OJK Regulation No. 13/POJK.02.2018 which has been revoked by POJK 3/2024) to further test and supervise business models that are related to financial technology which have yet been regulated. POJK 3/2024 then improved the regulation concerning the regulatory sandbox to perfect the previous mechanism and to create more legal certainty on the regulation and supervision of the ITSK activities. The perfections are among others (i) the addition of eligibility criteria and (ii) the requirement to have an exit policy – the Organizer must submit an exit policy and transitional policy if the innovation cannot pass the sandbox testing.
Generally, the regulatory sandbox is a testing mechanism carried out by the OJK to assess the reliability of a business model of an organizer. This is to ensure that the innovation and the development of technology in the financial sector are conducted responsibly. The scope of the Sandbox includes the granting of:
- Facilities to conduct an experiment that is conducted within a certain timeframe and limited environment.
- Facilities to obtain an explanation of the provisions applicable in the financial services sector.
- Facilities to conduct the development of ITSK at the early stage.
- Other facilities for the experiment and development of the ITSK.
Every ITSK Organizer who wishes to participate as a participant in the Sandbox must apply to the OJK. The application includes the sandbox application form, examination plan and other supporting documents.
For an ITSK Organizer to be eligible as a participant in the sandbox, the OJK must approve the examination plan and the ITSK Organizer must fulfil the innovation feasibility criteria set out under the POJK 3/2024. If the ITSK Organizer is accepted as the sandbox participant, the experiment process and innovation development will be conducted within a maximum of 1 year from the acceptance. During this phase, the OJK will conduct supervision over the ITSK Organizer and the ITSK Organizer is obliged to carry out various periodic reports to the OJK.
The ITSK Organizer may pass or fail the Sandbox. If the ITSK Organizer passes the Sandbox, OJK will issue a “pass letter” which must be utilized within a certain timeframe to obtain the relevant license.
The Supervision, Evaluation and Monitoring by the OJK
After obtaining the relevant license from the OJK, the OJK will conduct supervision, evaluation and monitoring of the ITSK Organizer.
- Supervision – the OJK will conduct direct and indirect supervision that covers supervision based on (i) risks and technologies and (ii) market disciplines.
- Evaluation – the ITSK Organizer that is registered and/or has obtained the relevant license from the OJK must conduct a self-evaluation.
- Monitoring – the OJK will appoint and set an ITSK Organizer association to set out monitoring standards.
Various Obligations of the ITSK Organizer
Aside from the supervision, evaluation and monitoring by the OJK, the ITSK Organizer that is registered and/or has obtained the relevant license from the OJK must conduct several obligations, among others: (i) to submit a periodic and incidental report to OJK; (ii) own an electronic system strategic plan that supports the business of ITSK Organizer; (iii) own a data centre and disaster recovery centre, and (iv) practice personal data protection in its operation.
Conclusion:
The OJK keeps taking a progressive approach to implement the P2SK Law and to keep up with the development of technology. In general, we view that the enactment of POJK 3/2024 would greatly impact the innovation of technology in financial sector business. POJK 3/2024 has a wider scope compared to the previous OJK Regulation on Digital Financial Innovations within the Financial Services Sector. POJK 3/2024 also addresses specific issues that were not governed previously, especially on the regulatory sandbox process and the obligation of ITSK Organizer. Hopefully, POJK 3/2024 can create an integrated Fintech ecosystem with an activity-based approach to promote innovation yet still maintain the consumers’ protection.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
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