How circular 31 test rules affect insurers

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On 30 August 2016, Indonesia’s Financial Services Authority (OJK) issued circular No. 31 on Fit and Proper Test (FPT) for Financial Services Institutions (FSI) Primary Parties, which took effect on the same date. Circular No. 31 further implements OJK regulation No. 27 on FPT for FSI Primary Parties.

how-circular-31-test-rules-affect-insurersAll FPT applications for insurance primary parties must be made in accordance with circular No. 31. As circular No. 31 requires a substantially different set of application forms and supporting documents, insurance companies that are in the midst of preparing FPT applications will need to restart them.

Noteworthy provisions

Circular No. 31 now clarifies that a controller of an insurance company means:

  1. An individual and/or legal entity that holds shares in an insurance company and meets the criteria of a controlling shareholder;
  2. An individual and/or legal entity that does not hold shares in an insurance company, but is assigned as a controller by the insurance company; and/or
  3. An individual and/or legal entity that does not hold shares in an insurance company, but is assigned as a controller by the OJK.

Circular No. 31 also defines a controlling shareholder as an individual, legal entity and/or group of companies that:

  1. Owns 25% or more of the issued shares with voting rights; or
  2. Owns less than 25% of the issued shares with voting rights, but has direct or indirect control.

This means that circular No. 31 now clarifies that a controlling share-holder (as controller) is also subject to an FPT.

FPT procedures

The following parties must submit an application, with the required forms and supporting documents stipulated in circular No. 31, to the OJK:

  1. The prospective owner, founder or board of directors (BOD) members of the insurance company, if the application is submitted in relation to obtaining an insurance business licence on establishment; or
  2. The BOD members of the insurance company, if the application is submitted after obtaining an insurance business licence.

istock-162332445The nomination and remuneration committee of an insurance company must first conduct a self-assessment on the other primary parties using a specific form stipulated under circular No. 31. The completed self-assessment form then must be submitted together with the FPT application to the OJK.

A self-assessment does not need to be carried out for a controlling shareholder or for a controller.

FPT assessment

The controlling shareholder or the controller must undergo the following assessments as part of the FPT:

  1. An administrative assessment (to assess integrity requirements, financial reputation requirements or financial soundness requirements and/or competency requirements); and
  2. A presentation by the controlling shareholder or the controller, if deemed necessary by the OJK, on: (i) a proposed development plan for the insurance company for the next three years; and (ii) a proposed strategy if the insurance company is encountering financial difficulties.

The other primary party must undergo the following assessments as part of the FPT:

  1. An administrative assessment; and
  2. Provide clarifications if: (i) the OJK has negative information about the candidate; (ii) the candidate does not have any experience related to his/her intended position in an insurance company; and/or (iii) the candidate has previously failed an FPT.

The FPT written decision will be issued to the insurance company within 30 working days after the OJK receives a complete application. If the FPT decision is affirmative, then:

  1. The controlling shareholder or the controller is permitted to acquire the insurance company’s shares; and
  2. The other primary party is permitted to assume the intended position and his/her effective date of appointment must be no later than three months after the FPT decision date.

If the FPT decision is negative, then:

  1. The proposed controlling shareholder is prohibited from acquiring the insurance company’s shares;
  2. The proposed controller is prohibited from taking control over the insurance company (i.e., it must not directly or indirectly influence the management and/or the policy of the insurance company); and
  3. The proposed other primary party is prohibited from being appointed to hold the intended position.

If the FPT decision is negative, and the controlling shareholder already holds the insurance company’s shares, then:

  1. It must transfer its shares in the insurance company within one year after the FPT decision date, such that it will no longer be a controlling shareholder. However, it is prohibited to transfer shares to its affiliated parties; and
  2. It will not be able to exercise its shareholder rights over the newly acquired insurance company’s shares.

Failure to transfer the insurance company’s shares will mean that the controlling shareholder will not be able to exercise its shareholder rights over all of its shares in the insurance company.

If the FPT decision is negative and the controlling shareholder already controls the insurance company, then it must release its control.

If the FPT decision is negative and the other primary party has already been appointed to the intended position, then his/her appointment must be cancelled no later than three months from the FPT decision date.