This is the second series of client alerts in relation to the draft omnibus law on the financial sector passed by the House of Representative on 15 December 2022, publicly known as the PS2K Law. You may access our previous client alert in relation to the impact of the P2SK Law to the financial technology sector here.
The soon-to-be enacted P2SK Law introduces “financing service businesses” as a new umbrella term for several categories of financing services, covering the businesses of finance companies (multifinance), venture capital companies, infrastructure financing companies, IT-based collective funding service providers (peer-to-peer lending platforms), and pawnbroker companies.
Over the recent years, the financing sector, particularly those that are sourced through online platforms, have been marred with controversies that call for enhanced government supervision to ensure that bad actors cannot take advantage of Indonesian consumers, particularly those more vulnerable to fraudulent practices. The P2SK Law indicates that more robust consumer protection regulations, including those that cover the financing service businesses sector, are expected to come.
Consistent with the government’s focus on responding to rapid changes in technological advancements and fostering the start-up business environment, P2SK Law also affirms that the status of venture funds (formed as collective investment contracts) is equivalent to a legal entity. This could bring legal certainty to investors, financiers and venture capital companies in forming venture funds that power start-ups, and hopefully would bring a positive impact on how local start-ups can raise funding to grow.
Another angle on what we think would be of particular interest for investors considering market entry into Indonesia will be how the government plans to regulate the shareholding ownership of these financing service businesses. Further clarifications on how foreign entities would partner with local investors will need to be addressed in the promised implementing regulation.
In line with consumer protection concerns, the new changes introduced in the P2SK Law emphasize stronger risk management and strengthen the authorities of the OJK (the Indonesian Financial Services Authority) in facilitating the resolution of capital and liquidity problems of financing service business providers, including by way of the OJK mandating the shareholders to inject more capital.
Previously, after the issuance of OJK Regulation No. 47/POJK.05/2020 on Business Licensing and Institution of Finance Companies and Sharia Finance Companies, many finance companies have struggled to meet the new capital requirements, which were increased to ensure stability and resiliency of their business operations. Past experiences dealing with the restructuring and closure of many finance companies may have contributed to OJK intending to take a more proactive role in mitigating significant business disruptions as higher capital requirements are also implemented across the board.
These provisions are not new, as similar provisions have been introduced in the banking sector and have in practice been conducted by OJK. But the P2SK Law finally crystallized these authorities for application to financing service business providers. Licensing applications also now require evidence of the feasibility of a company’s risk management system, which indicates a push for more stringent requirements to attest to the readiness of prospective finance service business providers and better corporate governance.
Moreover, the P2SK Law sets out the types of legal entity permitted for a financing service business provider, which are limited liability companies and cooperatives. There may be more specific regulations that only allow the use of limited liability companies, such as for finance companies and for P2P lending platforms.
On a positive note, there is a fast-growing trend in the Indonesian financing service markets to create synergies between specific financing capabilities of different financing service business types through establishment of a holding company. Foreign investors planning to leverage this trend may need to continue monitoring the planned implementation of government regulation deriving from the P2SK Law on ownership by foreign entities and individuals. The P2SK Law mentions that ownership by foreign entities should be conducted in partnership with local parties whether in the public or private sector. There is some ambiguity as to whether this is a callback to existing rules on maximum foreign shareholding or could indicate a new requirement for foreign entities.
In relation to management of venture funds, as one type of business activity that venture capital companies can conduct, the P2SK Law has now, under the rubric of financing service businesses, affirmed the equivalence of legal status between venture funds (formed by way of a collective investment contract) and legal entities. We sense that this points to the government’s cognizance of investors’ and financiers’ reluctance to invest in and finance start-ups through venture funds. We expect that this affirmation and upcoming implementing regulations around the legal status of venture funds would guide the risk appetite of local and foreign investors/financiers to invest in Indonesia’s start-up ecosystem.
Another interesting thing worth pointing out is that the P2SK Law exempts certain types of activity from the scope of “financing service businesses”, including every party that gives out loans or financing that are not purposed as a continuous conduct that is profit oriented.
As one of the biggest markets globally, poised to become the next Southeast Asian digital economy power, Indonesia is equipping itself with the foundational tools needed to accelerate the digital transformation of its financing services space. The move to harmonize governance of the previously fragmented financing service businesses are indicative of the government’s realignment of priorities in a sector that is ripe with innovation but is prone to misconduct and lack of consumer protection. Players in this sector should gear up to swiftly adjust to the shifts and expect to see a transitional phase that may be patchy at first but will hopefully lead to a more resilient industry. Watch out for more client alerts covering the potential impacts of the P2SK Law on other sectors in the financial services space.
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