On 25th April 2017, the Financial Services Authority ("OJK") issued Regulation 17/POJK.05/2017 ("Regulation 17") on Guidelines on Administrative Sanctions in the Insurance Sector and Freezing of Assets of Insurance Companies, Shariah Insurance Companies, Reinsurance Companies and Shariah Reinsurance Companies. Regulation 17 became effective on 25th April 2017.
Regulation 17 is an implementing regulation of Law No. 40 of 2014 on Insurance ("Insurance Law").
Below are the types of administrative sanctions under the Insurance Law and Regulation 17:
- warning letters
- limitations imposed on business activities (in part or in full)
- restrictions to distribute certain products
- revocation of business licenses
- cancellation of business licenses (for insurance broking companies, reinsurance broking companies and insurance agents)
- cancellation of registrations (for actuary consultants, public accountants, loss adjusters or other parties providing services to insurance companies)
- cancellation of approvals (for mediation board or association)
- fines
- placing a person on a blacklist to become a director, a commissioner, a member of a shariah supervisory board or a senior management officer (one level below board of directors) in insurance companies (conventional or shariah), reinsurance companies (conventional or shariah), insurance broking companies, reinsurance broking companies or loss adjuster companies.
Overview
As a general rule, the OJK would issue administrative sanctions incrementally (eg. the OJK should issue a warning letter before it escalates the sanctions including ultimately to the revocation of business licenses). However, there are now exceptions to this general rule.
Further sanctions now are more wide-ranging, onerous and, while many require that there is a proven case (sometimes in court (eg. criminal acts)), the sanctions should give pause to how companies, shareholders and broader management attend to matters, deal with the OJK and deal with customers.
In particular, there will be a concern on the OJK issuing recommendations, which if not complied with, could lead to sanctions.
Certain Key Provisions
Below are some of the key provisions of Regulation 17.
- Business License Revocation
Under Regulation 17, the OJK can revoke a business license without issuing even a warning letter if:
- the OJK is of the view that the company's financial condition has significantly worsened (eg. the company’s RBC drops below the minimum level within one year after the latest stress test was conducted);
- the OJK is of the view that the company's shareholders are not cooperative (eg. the shareholders do not implement a recommendation given by the OJK);
- the OJK is of the view that the board of directors, the board of commissioners, or the shariah supervisory board do not present a solution to settle any issues that could negatively impact customers' interests (eg. the board of directors does not make efforts to ensure that the company’s assets are sufficient to meet its liabilities);
- there is a regulation that permits the OJK to do so;
- the OJK is of the view that there are other circumstances that could negatively impact customers' interests.
- Blacklist Sanctions
Under Regulation 17, the OJK can blacklist a person from becoming a director, a commissioner, a member of a shariah supervisory board, a senior management officer (one level below the board of directors), a shareholder or a controller.
- The OJK can blacklist a person from being a commissioner, a member of a shariah supervisory board, a senior management officer (one level below the board of directors):
for three years, if that person:
- breaches prudential principles applicable in the insurance sector;
- does not implement an order or recommendation of the OJK;
- is unable to manage the company;
- refuses to give commitments to the OJK or does not keep commitments previously given to the OJK.
for five years, if that person:
- hides any breach of regulations or the financial condition of the company or any transaction of the company;
- gives an unreasonable benefit to the shareholders, the board of commissioners, the board of directors, the shariah supervisory board, a senior management officer, an employee and/or other parties that could bring a loss to the company or lessens the company's revenues;
- commits one of the breaches under item 1 above more than one time.
for 20 years, if that person:
- commits a financial criminal act;
- causes the company to have financial difficulties that could affect the company's business continuity or that could affect the Indonesian insurance sector;
- causes the company's bankruptcy.
- the OJK can blacklist a person from being a shareholder or a controller:
for three years, if that person:
- influences or instructs a director, a commissioner, a member of the shariah supervisory board, a senior management officer or an employee to breach prudential principles applicable in the insurance sector;
- does not perform an order or recommendation of the OJK;
- is unable to perform necessary action to save the company from any financial difficulties;
- refuses to give commitments to the OJK or has not kept commitments previously given to the OJK;
for five years, if that person:
- influences or instructs the board of directors, the board of commissioners, the shariah supervisory board, a senior management officer or an employee to hide any breach of regulations or the financial condition of the company or any transaction of the company;
- influences or instructs the board of directors, the board of commissioners, the shariah supervisory board, a senior management officer or an employee to give an unreasonable benefit to the shareholders, the board of directors, the board of commissioners, the shariah supervisory board, a senior management officer, an employee and/or other parties that could bring a loss to the company or lessens the company's revenues;
- commits one of the breaches under item 1 above more than one time.
for 20 years, if that person:
- commits a financial criminal act;
- causes the company to have financial difficulties that could affect the company's business continuity or that could affect the Indonesian insurance sector;
- causes the company's bankruptcy.
For the purposes of Regulation 17,
- A "person" can be an individual or a legal entity.
- A "company" means insurance companies (conventional or shariah), reinsurance companies (conventional or shariah), insurance broking companies, reinsurance broking companies or loss adjuster companies.
The OJK will announce the above administrative sanctions to the public through the OJK's website or other nationwide publications.
The OJK will revoke the administrative sanctions if the breach has been rectified.
- Asset Freeze
Regulation 17 provides authority to the OJK to freeze a company's assets (in part or in full) if the company's license is suspended due to its inability to meet the minimum RBC level or if the company’s license is revoked.
A "company" means insurance companies (conventional or shariah), reinsurance companies (conventional or shariah), insurance broking companies, reinsurance broking companies or loss adjuster companies.
In freezing assets, the OJK can send notifications to relevant financial institutions (eg. banks, settlement agencies, and custodian banks), land offices and/or other relevant entities.
The types of assets that can be frozen are assets set out under OJK Regulation 71/POJK.05/2016 on Financial Soundness; which include time deposits, listed shares, corporate bonds, land titles, and strata titles.
The OJK must revoke its asset freezing order if the OJK is of the view that:
- the breach has been rectified by the company;
- the asset freezing is no longer needed.
The asset freezing cannot be appealed by the company as it is not an administrative sanction.
- Insurance companies' right to appeal administrative sanctions
A company that is subject to an administrative sanction is entitled to submit an appeal to the OJK. The appeal must be submitted within 10 working days after the OJK issues the sanction letter.
It remains unclear to whom the appeal should be submitted, eg. whether the appeal should be submitted to the department that issued the sanction or to the State Administrative Court, and whether there is a right of appeal to the State Administrative Court.
Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 9th may 2017
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