[Analytics] Indonesia’s financial sector needs more consumer protection

A motorcycle taxi driver waits for orders in the business district on Jl. Sudirman (Jakarta, Indonesia) on April 26. (Antara/Dhemas Reviyanto). Sketched by the Pan Pacific Agency.

In line with the Indonesian government’s goal to build a strong financial sector, the Indonesian Financial Services Authority (OJK) recently enacted regulation concerning Consumer and Public Protection in the Financial Services Sector (POJK 6 of 2022). The POJK came into force on 18 April 2022, but micro-financial institutions are exempted for the next five years. Raissa Richka Jonah, Trigaya Ahimsa specially for the East Asia Forum.

The enactment of the new POJK could majorly update the OJK’s stated goal of maintaining a stable and transparent financial sector while protecting consumers and society. Protecting the public interest was a concern that gave rise to the establishment of OJK back in 2012, so it was no surprise that its first regulation concerned consumer protection. The OJK is adapting to the rapid development of fintech and digital financing — a sector that attracted US$102 billion in global investment in 2021.

The unprecedented growth in fintech and digital financing over the last few years means that the financial services offered by both banks and non-bank financial institutions are often unconstrained by existing regulations. The OJK has accommodated these new technologies in the financial sector by enacting regulations like the 2016 Information Technology-based Loan Arrangements governing peer-to-peer lending.

OJK regulations have historically steered towards mitigating financial risk instead of upholding consumer protection. But the OJK is now paying closer attention to consumer protection despite its best efforts to accommodate the development of fintech and digital financing to avoid being outcompeted as an investment host.

The newly enacted POJK provides a comprehensive legal framework for consumer protection by taking into account the life cycle of financial products — including their design, the provision and delivery of information, marketing, the drafting of agreements, the offering of financial services and compliance settlements.

This new approach means that financial institutions may face additional regulatory requirements and obligations when conducting business. One of the most interesting provisions is the obligation for firms to map-out a design process prior to the launch of novel financial products. Financial institutions are now required to take into account the needs of their consumers as well as the features, risks and cost of their products. This indicates that the OJK aims to conduct more comprehensive supervision over the development of financial products and services.

But the new POJK only requires financial institutions to document the design process instead of providing an official report to the OJK. This raises questions if OJK will supervise the whole design process, and financial institutions will be required to file a product or service design report prior to the official launch. The mechanism to supervise the design process might need to be further strengthened by additional regulations to deal with this shortcoming.

Another major change implemented by the POJK is the obligation for financial institutions to compile more complete records when offering products or services through personal communication channels. Both providers and consumers will need to hold a complete record of discussions to prevent misleading information being shared about offered products or services.

Proper record keeping is a major change from past precedent when potential customers were not fully aware of the features and risks contained in products. The unit link insurance plan — a product giving investors both insurance and investment under a single plan — is one of many products causing disputes due to the financial illiteracy of customers or intentional misinformation by insurance agents.

It is sensible for the OJK to require financial institutions to provide complete product information and confirm that customers are fully informed about what they are purchasing. Records of this information will be of significant value as evidence in legal disputes. Financial institutions must also ensure that they have sufficient legal and technical capacity to fully comply with the regulation.

The POJK reaffirms the OJK’s authority to file lawsuits against financial institutions and firms, a power that has been stipulated by previous legislation — but never exercised. While lawsuits can only be filed at the OJK’s discretion, not by consumers’ request, they will still benefit consumers seeking compensation for losses and damages suffered due to the violation of OJK regulations.

Despite the need to implement more financial regulation and provide better policy mechanisms to protect consumers, the POJK 6 of 2022 demonstrates Indonesia’s commitment to supporting the development of fintech and digital financing, while increasing consumer trust in the financial sector.

Raissa Richka Jonah works as a lawyer at Walalangi & Partners, Indonesia. She is also an alumnus of Universitas Indonesia.

Trigaya Ahimsa is a research assistant at the Indonesia Financial Services Authority and a postgraduate student at Universitas Indonesia. The opinions expressed in this publication are those of the authors and do not necessarily reflect the opinions or views of their respective employers.

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