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The Capital Market and Financial Institutions Supervisory Agency said on Wednesday that it planned to increase supervision of mutual and discretionary funds to help protect investors.

Fuad Rachmany, chairman of the agency, also known as Bapepam-LK, said the agency’s primary focus this year would be to implement measures to build confidence in mutual funds and discretionary funds — or funds where the management is free to invest clients’ money without restrictions regarding the type of security.

Better regulation of the industry would minimize investor losses through fraud and other crimes and increase confidence in investing, he said.

“Mutual funds depend highly on people’s trust,” Fuad said.

Bapepam-LK said it was taking a number of specific actions, including coordinating with National Police to prosecute fund managers that operated without licenses.

The agency is also requiring fund managers to separate the assets of their firms and the assets belonging to clients, Fuad said.

Fund managers will also be required to set up accounts in custodian banks in which to place the discretionary funds under their management.

Legal contracts between banks and fund managers about how the money should be managed will be mandatory, Fuad said.

He gave several examples of cases that had eroded investor confidence in recent years. They included broker PT Antaboga Delta Sekuritas offering unlicensed discretionary funds to customers of its affiliate — PT Bank Century — in 2007.

These funds turned out to be nonexistent and the scam resulted in Bank Century customers suffering losses of Rp 2.5 trillion ($270 million).

Another case that dented investor confidence was when executives of broker PT Sarijaya Permana Sekuritas stole Rp 245 billion in 2008 from about 8,000 clients, Fuad said.

Djoko Hendratto, Bapepam-LK’s head of investment management, said the agency would intensify scrutiny of investment sales agents, including whether they are selling products that had not been approved by the agency.

He said Bapepam-LK would issue a regulation applying to bilateral contracts between fund managers and clients that would give more rights to clients and enable them to more easily take fund managers to court. Currently, these contracts come under the regular criminal code.

Robinson Simbolon, Bapepam-LK’s head of legal and regulatory affairs, said the agency was also proposing that the government revise the law related to embezzling funds, to bring the crime under the Capital Markets Law rather than the regular criminal code.

Abiprayadi Riyanto, chairman of the Indonesian Mutual Fund Managers Association, urged the association’s members to improve their risk management instead of just chasing profits.

Meanwhile, despite the recent cases of fraud involving mutual and discretionary funds, the amount of money invested in such funds continues to grow, reaching Rp 116.73 trillion at the end of 2009. Fuad said he hoped the amount would increase to Rp 200 trillion by the end of this year.

However, Abiprayadi said he expected the amount invested in funds to grow by 20 percent to 30 percent this year, to around Rp 140 trillion to Rp 150 trillion.