FINANCIAL SERVICES AUTHORITY

REPUBLIC OF INDONESIA

COPY

FINANCIAL SERVICES AUTHORITY REGULATION

NUMBER 10/POJK.05/2014

CONCERNING

RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

BY THE GRACE OF GOD ALMIGHTY,
THE COMMISSIONERS' COUNCIL OF THE FINANCIAL SERVICES AUTHORITY,

Considering:
a. that in order to realize a healthy and accountable non-bank financial services sector, an effective supervision system is needed; b. that in order to realize an effective supervision system, several prerequisites are needed, such as risk level assessment instruments for non-bank financial service institutions to determine supervision priorities and intensity;
c. that non-bank financial service institutions need to conduct risk level assessments as part of risk management;
d. that based on considerations as referred to in letters a, b, and c, it is necessary to establish a Financial Services Authority Regulation concerning Risk Level Assessment of Non-Bank Financial Service Institutions;

Recalling: 1. Law Number 2 of 1992 concerning Insurance Business (State Gazette of the Republic of Indonesia Year 1992 Number 13, Supplement to State Gazette of the Republic of Indonesia Number 3467);
2. Law Number 11 of 1992 concerning Pension Funds (State Gazette of the Republic of Indonesia Year 1992 Number 37, Supplement to State Gazette of the Republic of Indonesia...)

Indonesia Number 3477);
3. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to State Gazette of the Republic of Indonesia Number 5253);
4. Government Regulation Number 73 of 1992 concerning the Conduct of Insurance Business (State Gazette of the Republic of Indonesia Year 1992 Number 120, Supplement to State Gazette of the Republic of Indonesia Number 3506) as amended several times lastly with Government Regulation Number 81 of 2008 (State Gazette of the Republic of Indonesia Year 2008 Number 212, Supplement to State Gazette of the Republic of Indonesia Number 4954);
5. Government Regulation Number 76 of 1992 concerning Employer Pension Funds (State Gazette of the Republic of Indonesia Year 1992 Number 126, Supplement to State Gazette of the Republic of Indonesia Number 3507);
6. Government Regulation Number 77 of 1992 concerning Financial Institution Pension Funds (State Gazette of the Republic of Indonesia Year 1992 Number 127, Supplement to State Gazette of the Republic of Indonesia Number 3508);
7. Presidential Regulation Number 9 of 2009 concerning Financing Institutions;

DECIDING:
Establishing: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS.

CHAPTER I

GENERAL PROVISIONS

Article 1

In this Financial Services Authority Regulation, the following terms are defined as:

1. Non-Bank Financial Service Institutions are:
   a. insurance companies and reinsurance companies, including those conducting all or part of their business using Sharia principles, as referred to in legislation in the field of insurance business; b. financing companies, including those conducting all or part of their business using Sharia principles, as referred to in legislation in the field of financing institutions; and
   c. pension funds, including those conducting all or part of their business using Sharia principles, as referred to in legislation in the field of pension funds.
2. Financial Services Authority, hereinafter abbreviated as OJK, is an independent agency free from the interference of other parties having the function, duties, and authority for regulation, supervision, examination, and investigation, as referred to in Law Number 21 of 2011 concerning the Financial Services Authority.

CHAPTER II

RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

Article 2

(1) Non-Bank Financial Service Institutions must apply prudential principles and risk management in conducting their business activities.
(2) In order to implement risk management as referred to in paragraph (1), Non-Bank Financial Service Institutions must conduct risk level assessments in accordance with this OJK Regulation and its implementing regulations. (3) Risk level assessments as referred to in paragraph (2) must be conducted at least once a year for year-end positions. (4) If necessary, OJK may request Non-Bank Financial Service Institutions to conduct risk level assessments at any time.

Article 3

(1) For supervision purposes, OJK conducts risk level assessments of Non-Bank Financial Service Institutions.
(2) Risk level assessments as referred to in paragraph (1) are conducted by considering the risk level assessments conducted by Non-Bank Financial Service Institutions as referred to in Article 2 paragraph (3) and paragraph (4).

CHAPTER III

METHODS FOR RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

Article 4

(1) Risk level assessment of Non-Bank Financial Service Institutions is an assessment of the probability of failure of Non-Bank Financial Service Institutions to fulfill their obligations to customers and other parties. (2) Risk level assessment of Non-Bank Financial Service Institutions is conducted through assessment of:
a. strategic risk; b. operational risk;
c. asset and liability risk;
d. governance risk; e. management risk; f. funding support risk; g. insurance risk, specifically for insurance companies and reinsurance companies; and h. financing risk, specifically for financing companies.

Article 5

(1) Risk level assessments as referred to in Article 2 paragraph (3) and paragraph (4) result in risk values and risk levels of Non-Bank Financial Service Institutions. (2) Risk values and risk levels as referred to in paragraph (1) are categorized as follows:
a. risk value from 0 (zero) to 1 (one) for Low risk level; b. risk value greater than 1 (one) to 1.5 (one point five) for Medium-Low risk level;
c. risk value greater than 1.5 (one point five) to 2 (two) for Medium-High risk level;
d. risk value greater than 2 (two) to 3 (three) for High risk level; and e. risk value greater than 3 (three) to 4 (four) for Very High risk level.
(3) Risk values and risk levels as referred to in paragraph (1) are conducted based on comprehensive and structured analysis of risks as referred to in Article 4 paragraph (2), taking into account the materiality and significance of each type of risk. (4) Further provisions regarding risk level assessments as referred to in paragraph (1) are regulated further by OJK Circular Letter.

CHAPTER IV

REPORTING OF RISK LEVEL ASSESSMENT RESULTS OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

Article 6

(1) Non-Bank Financial Service Institutions must prepare reports on risk level assessment results as referred to in Article 2 paragraph (3) and paragraph (4).
(2) The Board of Directors, Board of Commissioners, or organs executing management and supervision functions at Non-Bank Financial Service Institutions are responsible for the truthfulness, completeness of content, and timeliness of submission of risk level assessment result reports. (3) Reports on risk level assessment results as referred to in paragraph (1) must contain at least the risk value and risk level of Non-Bank Financial Service Institutions.

Article 7

(1) Non-Bank Financial Service Institutions must submit reports on risk level assessment results as referred to in Article 6 to OJK with the following provisions:
a. for year-end position risk level assessments as referred to in Article 2 paragraph (3), submission must be made no later than February 28 of the following year; and b. for ad-hoc risk level assessments as referred to in Article 2 paragraph (4), submission must be made according to the deadline set by OJK. (2) In the event that February 28 as referred to in paragraph (1) letter a falls on a holiday, the risk level assessment result report must be submitted on the next working day. (3) Further provisions regarding the format and procedures for submitting risk level assessment result reports as referred to in paragraph (1) are regulated in OJK Circular Letter.

CHAPTER V

FOLLOW-UP ON RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

Article 8

(1) Non-Bank Financial Service Institutions must prepare and implement follow-up plans for risk level assessments as referred to in Article 2 paragraph (2) and paragraph (4). (2) In the event that the risk level of Non-Bank Financial Service Institutions as referred to in Article 5 paragraph (1) is High or Very High, Non-Bank Financial Service Institutions must submit follow-up plans to OJK. (3) Follow-up plans as referred to in paragraphs (1) and (2) must contain at least steps to reduce the risk level and the timeframe required to implement those steps. (4) Submission of follow-up plans as referred to in paragraph (2) must be made no later than:
a. March 31 of the following year for year-end position risk level assessments; and b. dates set by OJK for risk level assessments upon OJK's request as referred to in Article 2 paragraph (4). (5) In the event that March 31 as referred to in paragraph (4) letter a falls on a holiday, the follow-up plan must be submitted on the next working day. (6) Further provisions regarding the format and procedures for submitting follow-up plans as referred to in paragraph (1) are regulated in OJK Circular Letter.

Article 9

(1) In order to follow up on risk level assessments as referred to in Article 3 paragraph (1), OJK has the authority to:
a. request Non-Bank Financial Service Institutions to adjust follow-up plans as referred to in Article 8 paragraph (1) and paragraph (2); b. issue written orders to Non-Bank Financial Service Institutions and/or specific parties;
c. appoint statutory managers;
d. determine the use of statutory managers; e. revoke the business license of Non-Bank Financial Service Institutions; and f. determine the dissolution of Non-Bank Financial Service Institutions. (2) Non-Bank Financial Service Institutions may respond to OJK requests as referred to in paragraph (1) letter a no later than 15 (fifteen) working days since receipt of the OJK request by the Non-Bank Financial Service Institution.

CHAPTER VI

SANCTIONS

Article 10

(1) Non-Bank Financial Service Institutions that fail to comply with provisions as referred to in Article 2, Article 6, Article 7, and Article 8 may be subject to sanctions consisting of:
a. written warnings; b. fines, namely the obligation to pay a certain amount of money;
c. obligations for the Board of Directors or equivalent at Non-Bank Financial Service Institutions to undergo re-evaluation of competence and propriety;
d. restriction of business activities; e. suspension of business activities; and f. revocation of business licenses.
(2) Sanctions as referred to in paragraph (1) letters b, c, d, e, or f may be imposed with or without prior imposition of written warning sanctions as referred to in paragraph (1) letter a. (3) Fine sanctions as referred to in paragraph (1) letter b may be imposed separately or together with sanctions as referred to in paragraph (1) letters a, c, d, e, or f. (4) The amount of fine sanctions as referred to in paragraph (1) letter b is determined by OJK based on provisions regarding administrative sanctions in the form of fines applicable to each financial services sector. (5) OJK may announce the imposition of administrative sanctions as referred to in paragraph (1) to the public.

CHAPTER VII

CLOSING PROVISIONS

Article 11

(1) Risk level assessments as referred to in Article 2 paragraph (2) are effectively implemented starting from January 1, 2015, i.e., for risk level assessments for positions as of December 31, 2014. (2) Preparation and implementation of follow-up plans as referred to in Article 6 paragraph (1) are effectively implemented starting from January 1, 2015.

Article 12

This OJK Regulation takes effect upon being promulgated.
To ensure everyone knows it, it is ordered to promulgate this OJK Regulation by placing it in the State Gazette of the Republic of Indonesia.

Determined in Jakarta on August 27
CHAIRMAN OF THE COMMISSIONERS' COUNCIL
FINANCIAL SERVICES AUTHORITY
Signed.
MULIAMAN D. HADAD
Promulgated in Jakarta on August 28, 2014
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA
Signed.
AMIR SYAMSUDIN
STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2014 NUMBER 197 Copy consistent with the original Legal Director I Ministry of Law, Signed.
Tini Kustini

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 10/POJK.05/2014
CONCERNING
RISK LEVEL ASSESSMENT OF NON-BANK FINANCIAL SERVICE INSTITUTIONS

I. GENERAL
OJK is an independent agency formed with the goal that the financial services sector is organized in an orderly, fair, transparent, and accountable manner, capable of realizing a financial system that grows sustainably and stably, and capable of protecting consumer and public interests. To achieve these goals, OJK needs to conduct effective supervision of financial service institutions. Non-Bank Financial Service Institutions are a financial services industry currently in a growth phase. Along with the rapid growth of Non-Bank Financial Service Institutions, the complexity and risks inherent in the business activities of Non-Bank Financial Institutions also increase. Supervision of Non-Bank Financial Service Institutions conducted by OJK must be able to identify the risks of Non-Bank Financial Service Institutions and encourage Non-Bank Financial Service Institutions to overcome existing risks as early as possible. Furthermore, every Non-Bank Financial Service Institution needs to apply risk management to minimize the potential failure of its business operations. As part of the implementation of risk management, Non-Bank Financial Service Institutions need to have mechanisms for measuring and assessing risk levels. This OJK Regulation regulates the obligation of Non-Bank Financial Service Institutions to conduct risk level assessments. In order for the risk level assessments conducted by each Non-Bank Financial Service Institution to have a common language, regulations regarding the risk level assessment of Non-Bank Financial Service Institutions are necessary.

II. ARTICLE BY ARTICLE
Article 1
Clearly sufficient.

Article 2
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Risk level assessment is a process of evaluating the risk of business activities of Non-Bank Financial Service Institutions measured in the form of risk levels and risk values.

Paragraph (3)
The term "year-end position" refers to the position as of December 31.

Paragraph (4)
Based on supervision results, OJK may request Non-Bank Financial Service Institutions to conduct risk level assessments at specific times other than year-end.

Article 3
Paragraph (1)
OJK conducts supervision of Non-Bank Financial Service Institutions using a risk-based approach. One stage of risk-based supervision activities is risk level assessment.

Paragraph (2)
In conducting risk level assessments of Non-Bank Financial Service Institutions, OJK uses various information, among others periodic reports such as financial reports and risk level assessments, non-periodic reports such as changes in governance reports, and other information such as complaint information.

Article 4
Paragraph (1)
Risk level assessment of Non-Bank Financial Service Institutions is a tool to detect the potential failure of Non-Bank Financial Service Institutions in fulfilling their obligations to customers or other parties. For insurance companies and reinsurance companies, risk is defined as the potential failure of the company in fulfilling its obligations to policyholders and insured parties. For pension funds, risk is defined as the potential failure of the pension fund in fulfilling its obligations to participants and other entitled parties. As for financing companies, risk is defined as the potential failure of the company in fulfilling its obligations to creditors.

Paragraph (2)
Letter a
Strategic risk assessment is conducted by identifying, assessing, and determining the level of risk that may arise as a result of the failure to set appropriate strategies in achieving the main objectives and targets of Non-Bank Financial Service Institutions.

Letter b
Operational risk assessment is conducted by identifying, assessing, and determining the level of risk that may arise as a result of unfeasibility or failure of internal processes, humans, information technology systems, and/or events originating from outside the environment of Non-Bank Financial Service Institutions.

Letter c
Asset and liability risk assessment is conducted by identifying, assessing, and determining the level of risk that may arise as a result of the failure to manage assets and liabilities of Non-Bank Financial Service Institutions.

Letter d
Governance risk assessment is conducted by identifying, assessing, and determining the level of risk that may arise as a result of the failure of Non-Bank Financial Service Institutions to maintain the best composition of its management, namely the Board of Directors and Board of Commissioners, or equivalents, who have high competence and integrity.

Letter e
Management risk assessment is conducted by identifying, assessing, and determining the level of risk resulting from potential failures in the implementation of good governance of Non-Bank Financial Service Institutions, inappropriate management styles, control environments, and behaviors of every party involved directly or indirectly with Non-Bank Financial Service Institutions.

Letter f
Funding support risk assessment is conducted by assessing the adequacy of funds/capital available at Non-Bank Financial Service Institutions, including the availability of access to additional funds/capital in facing losses or unexpected fund/capital needs.

Letter g
Insurance risk assessment is conducted by identifying, assessing, and determining the level of risk of failure of insurance companies to fulfill obligations to policyholders as a result of inadequate risk selection (underwriting) processes, premium setting (pricing), use of reinsurance, and/or claim handling.

Letter h
Financing risk assessment is conducted by identifying, assessing, and determining the level of risk resulting from the failure of debtors and/or other parties to fulfill obligations to financing companies.

Article 5
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Letter a
Non-Bank Financial Service Institutions are at a Low risk level if generally healthy and having a low risk of failure.

Letter b
Non-Bank Financial Service Institutions are at a Medium-Low risk level if generally healthy, but facing some minor problems which, if left unchecked, will increase the risk of the Non-Bank Financial Service Institution.

Letter c
Non-Bank Financial Service Institutions are at a Medium-High risk level if generally fairly healthy, but facing some significant problems that have the potential to cause the Non-Bank Financial Service Institution to be at high risk.

Letter d
Non-Bank Financial Service Institutions are at a High risk level if generally less healthy and having a high risk of failure.

Letter e
Non-Bank Financial Service Institutions are at a Very High risk level if generally unhealthy and having a very high risk of failure.

Paragraph (3)
The term "comprehensive analysis" refers to analysis of all types of risks, while "structured" means following risk level assessment guidelines.

Paragraph (4)
Matters regulated in OJK Circular Letters include guidelines for assessing each type of risk and guidelines for determining risk values and levels.

Article 6
Clearly sufficient.

Article 7
Clearly sufficient.

Article 8
Clearly sufficient.

Article 9
Paragraph (1)
Clearly sufficient.

Paragraph (2)
OJK requests to Non-Bank Financial Service Institutions to adjust follow-up plans can be communicated in writing via letters or through meetings or gatherings with Non-Bank Financial Service Institutions. The 15 (fifteen) working day deadline is calculated from the date of receipt of the letter from OJK or from the date of the meeting or gathering concerned.

Article 10
The application of sanctions for violations of this OJK Regulation is adjusted to the type and level of violation committed by Non-Bank Financial Service Institutions.

Article 11
Clearly sufficient.

Article 12
Clearly sufficient.

SUPPLEMENT TO STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 5575