New BI Scheme of Fit and Proper Tests for Commercial Bank Officials and Controlling Shareholders

Bank Indonesia Circular Letter No. 13/8/DPNP, dated 28 March 2011, on Fit and Proper Tests (“Circular Letter”) has been issued to implement Bank Indonesia Regulation No. 12/23/PBI/2010 on Fit and Proper Tests (“Regulation”). The intent is to revise the framework surrounding fit and proper tests so as to improve good governance in the banking industry. Specifically, to simplify the assessment mechanism, increase sanctions and other consequences for parties that are disqualified, increase the certainty of the implementation of sanctions, and to set out the rules for banks being administered by the Indonesian Deposit Insurance Corporation (Lembaga Penjamin Simpanan / LPS).

The aim of the fit and proper test is to evaluate the integrity and financial feasibility of controlling prospective and/or incumbent shareholders (PSP, as defined in Article 1 (5) of the Regulation); and the integrity, reputation and financial competence of the prospective and/or incumbent commissioners, directors, heads of foreign bank branch offices (Kantor Bank Cabang Asing / KCBA) and representative offices, as well as executive officers.

The Circular Letter sets out the parties that must undergo the fit and proper test in Section I; where Section II sets out the documentary and administrative requirements; the components of integrity, and financial feasibility/reputation/competency; as well as the test procedures.

Newly subjected to the fit and proper test are: prospective PSPs; commissioner candidates; director candidates of a bank engaged in a merger or an acquisition; as well as former PSPs, commissioners, directors, and executive officers where there are indications of issues relating to their integrity or financial feasibility/reputation/competency. Interviews are made mandatory only for prospective PSPs, director candidates with a compliance role, independent commissioner candidates, or if further clarifications are required. The Circular Letter also sets out the procedures for terminating a fit and proper test in Section II (F).

The sanctions are set out in Section III (C) and Appendixes 3a and 3b, and include prohibition from owning commercial bank shares and holding commissioner/director/executive positions. The sanctions are based on the type and frequency of offences and the non-compliance with prior sanctions, rather than on the impact of the conduct. Failure of the fit and proper test results in PSPs having to transfer the ownership of shares (within 6 months for commercial banks, pursuant to Section III C (5) (a)). While commissioners, directors, heads of foreign bank branches/representative offices, and executive officers have to depart from their positions.

The Circular Letter repeals and replaces Bank Indonesia Circular Letter No. No.6/15/DPNP, dated 31 March 2004; the Regulation repeals and replaces Bank Indonesia Regulation No. 5/25/PBI/2003; both on the same subject matter.

The Circular Letter has been in force since 28 March 2011, and the Regulation since 29 December 2010.