title: The Regulation and Supervision of Integrated Corporate Governance of Financial Conglomerates in Indonesia
Creators: name: Withheld, Name
Publisher: name: Griffith University
Year: 2019
Subjects: subject: Financial conglomerates
subject: Indonesia
subject: Regulation
subject: Supervision
subject: Integrated corporate governance

description: Financial conglomerates—a group of financial institutions under common control—are the salient feature of the Indonesian financial system. Various issues stem from their complex organisational structures, cross-sectoral activities and internal governance mechanisms. Many of these issues arise from the inadequacy of the traditional regulatory and supervisory regimes that focus on a financial institution as a separate legal entity, with little or no contemplation of a financial conglomerate. To address the issues posed by financial conglomerates, Indonesian policymakers conducted a financial reform and, subsequently, enacted the Law No 21 of 2011 on the Financial Service Authority (Otoritas Jasa Keuangan’s [OJK’s] Law) to establish an integrated financial services authority (OJK) with the mandate to establish integrated regulation and supervision of financial conglomerates. However, the OJK’s Law maintained the traditional regulatory and supervisory regimes, providing the OJK with an unsound legal basis for addressing financial conglomerates. Nonetheless, the OJK strived to regulate and supervise financial conglomerates. It enacted a set of regulations concerning the integrated corporate governance of financial conglomerates (hereafter, the Integrated Regulations) and established an integrated supervisory framework to oversee financial conglomerates (hereafter, the Integrated Supervision). Since their inception, both have been contested on the grounds that they contravene traditional laws and regulations. Yet, despite the importance of the Integrated Regulations and Integrated Supervision, there has been very little research on either and little is known about them. This thesis seeks to examine the effectiveness of the Integrated Regulations and Integrated Supervision. It employs a qualitative research method involving a literature review, doctrinal legal analysis and empirical research (interviews). It discusses the evolving phenomenon of financial conglomerates, identifies the issues posed by these conglomerates, assesses the adequacy of the Integrated Regulations and Integrated Supervision to address these issues and examines the legal coherence of the Integrated Regulations and other regulations. The implementation of the Integrated Regulations and Integrated Supervision were also investigated by conducting interviews with representatives of the lead entities of financial conglomerates and the OJK’s integrated supervisory teams. This thesis also provides some recommendations for enhancing the effectiveness of the Integrated Regulations and Integrated Supervision. This thesis finds that the Integrated Regulations and Integrated Supervision are ineffective in addressing the issues posed by financial conglomerates. The OJK’s Law does not provide a sound legal basis for OJK to regulate and supervise financial conglomerates and the Integrated Regulations contravene other laws and regulations, creating legal ambiguity and uncertainty for regulated entities. The Integrated Regulations are also incomplete, containing ambiguous provisions and failing to include important requirements to address the issues posed by financial conglomerates. Further, this thesis finds that although the lead entities of financial conglomerates strove to implement the requirements of the Integrated Regulations, they encountered challenges in doing so due to the corporate autonomy of entities within financial conglomerates and lack of authority of the lead entity to impose group-wide policy (such as that concerning the integrated corporate governance of those entities), disharmonised sectoral regulations, the incompleteness of the Integrated Regulations, and the dual-hatted role of integrated internal control functions. Additionally, the OJK’s integrated supervisory teams encountered challenges that prevented them from effectively implementing the Integrated Supervision and have not effectively overseen and enforced the Integrated Regulations. The challenges arose from the incompleteness of the Integrated Regulations, lack of resources, insufficient data and information, and b excessive bureaucratic processes due to OJK’s silo-sectoral organisation. Those challenges need to be addressed to improve the effectiveness of the Integrated Regulations and Integrated Supervision. This thesis’s recommendations for enhancing the Integrated Regulations are to enact a new law to govern financial conglomerates and to amend the Integrated Regulations to address their ambiguous provisions and incompleteness. The recommendations for enhancing the Integrated Supervision are to amend the OJK’s Law to remove OJK’s silo-sectoral organisation and to provide supervisory power to the OJK’s chairman to conduct integrated supervision; to add staff to the integrated supervisory teams; amending the OJK’s supervisory procedure to allow the integrated supervisory team to access the sectoral supervisory information system; and to expedite the development of the integrated information supervisory system.