A decade of the OJK’s establishment – How Independent is OJK?
Ilustrasi independensi Otoritas Jasa Keuangan (OJK). (Fais Azhar Djohari/SM)
Oleh Diana Wiyanti
This year is a decade of launching the OJK after the Government stipulated the Financial Service Authority (FSA/OJK) in Jakarta on November 22, 2011. OJK was established in response to the two previous supervisory authorities’ failure: Bank Indonesia (BI) and Bapepam-LK. Research by Quintyn & Taylor (2004) claimed when the first crisis hit, in Indonesia, the banking sector’s weakness stemmed from poorly enforced action against politically well-connected banks, particularly those linked to the Soeharto family. The Central Bank procedures to provide liquidity support to troubled banks were put aside. Direct instructions from the president have claimed it. And also, both authorities defaulted in facing the next crisis in 2008 as known as Global Financial Crisis. The regulator’s lack of independence exacerbates the financial problem. Then policymakers realize the need to protect financial sector regulators from political pressure. The establishment of OJK through OJK Law Number 21 of 2011 marked an integrated and independent supervisory body. OJK was a merger of Bank Indonesia and Bapepam-LK as the sole regulatory body responsible for regulating and supervising all financial industries and free from interference from other parties. While BI as a central Bank still has duties in the monetary policy. Currently, how is the independence of OJK after a decade of its existence?
Independent of OJK based on the OJK Law
The OJK Law does not explicitly define the definition of independent. Article 1 and 2 mention that OJK should be an independent agency free from intervention by any party while implementing its function, assignment, and control authority, supervision, and investigation. OJK functions to implement the integrated control and supervision system toward overall activities in financial services such as Banking, Capital Market, Insurance, Pension Fund, Finance Institutions, and other Financial Institutions should be (1) well organized, transparent, fair, and accountable; (2) capable of realizing the economic system of which grow stable and sustainably; and (3) capable of protecting the interest of consumers and the community.
In addition, Article 34 paragraph (2) mentions that the financing of the OJK originates from the State Revenue and Expenditure Budget (APBN). By doing so, Article 36 mentions OJK’s prior request for budget approval from the House of Representatives. Besides, OJK gets financial support and/or from parties who conduct activities in the financial service sector. Then, regarding the operational plan and budget, the OJK Board of Commissioners Regulation stipulates the financial, operational, administrative, asset procurement, and other supporting activities should be based on appropriate standards in the financial sector.
Related to the OJK Law, theoretically, Gilardi & Maggetti (2010) emphasized the main characteristic of regulatory institutions is their independence. As indicated by the OECD (2014), the “independence” of regulators from the government could never be absolute; however, the OECD claims that independence is a tool for more effective results. Furthermore, the United Kingdom’s Better Regulation Taskforce 2003 developed its description of an independent regulator as “A body which has been launched by Parliament Act, but which operates at arm’s length from government and which has one or more of the following powers: inspection; licensing; referral; advice to a third party; accreditation; or enforcement.” In addition, Quintyn & Taylor (2004) stated four dimensions of independence:
1) Regulatory independence means that regulators have broad autonomy in setting, at minimum, regulations and prudential rules that follow from the unique nature of financial intermediation;
2) Supervisory independence is essential in the financial sector to monitor and inspect, enforce sanctions, and even revoke licenses. Many of their activity takes place outside direct public view;
3) Institutional independence, the agency’s status outside the executive and legislative branches;
4) Budgetary independence depends primarily on the executive or the legislative branch’s role in determining the agency’s budget and how it’s used. Its funding comes from the government budget or through industry fees.
Why does OJK need to be independent?
Even though the term independent itself is not defined in the OJK law specifically, the OJK Law states that OJK must be an independent institution regulating and supervising financial institutions, free from interference from any party. Also, the explanation of the OJK Law emphasizes that OJK carries out its functions, duties, and authorities based on the independence principle. The reasons OJK as a sole financial supervisory agency needs to be independent are:
- Increasing the integrity of long-term policy commitments to prevent the next crisis
- Building the OJK with independence can present greater confidence and trust that regulatory decisions are made with integrity.
- A high level of integrity of OJK increases the outcomes of the regulatory decisions.
- The main objective of OJK in regulating and supervising is to promote the security and health of financial institutions independently.
- The process of regulation is shielding from such political unpredictability.
Thus, the OJK should possess the “check and balance” principle structure in line with governance and regulation. The Board of Commissioners shall undertake these through the clear assignment division to achieve its purpose. By doing so, the independent of the OJK shall be reflected in the leadership of this institution. As an individual, the OJK leader has the certainty of tenure and could not be terminated except meet the reasons expressly set in OJK Law.
Finally, in a decade of its establishment, OJK is a regulator that fulfills four independent dimensions. Even though OJK funding comes from the State Revenue and Expenditure Budget (APBN) and a prior ask for budget approval from the House of Representatives, OJK as a supervisor, in this case, should not experience political pressure through the budget, which will affect regulatory decisions. OJK must be impartial and efficient in achieving its objectives. In add, the Omnibus Law also emphasizes the OJK to be more being independent.
Penulis merupakan dosen Fakultas Hukum Unisba