Fintech
The Reserve Bank of India sets out a fintech self-regulatory framework
The new structure aims to encourage cooperation, innovation and ethical behavior in the fintech sector…
The new structure aims to encourage cooperation, innovation and ethical behavior in the fintech sector.
The Reserve Bank of India (RBI) urges responsible innovation and growth within the country Indian fintech industry establishing a framework for the recognition of self-regulatory organizations (SROs). This framework, finalized in May 2024 after incorporating stakeholder feedback on a draft published earlier this year, outlines the characteristics, eligibility criteria, functions and responsibilities that SROs must comply with.
The RBI has recognized the immense potential of the fintech sector in revolutionizing the delivery of financial services in India, but has also raised concerns that the rapid growth of this sector needs a sound regulatory framework to ensure consumer protection, stability finance and responsible innovation. In a press release, the RBI highlighted the potential benefits of self-regulation, saying: “By pivoting towards a culture of self-governance, fintechs could proactively establish and adhere to industry standards and best practices. This approach could allow the sector to demonstrate its commitment to responsible conduct and innovation even in the absence of formal regulation.” The central bank believes that SROs play a vital role in fostering collaboration within the industry, enabling Fintech companies to collectively address challenges, foster an environment conducive to innovation and encourage a shared commitment to ethical business practices.
THE MULTI-FACED ROLE OF OADs
The RBI expects SROs to act as guardians of ethical conduct and responsible innovation in the Fintech sector. This multi-faceted role includes several key responsibilities:
Ensure compliance with standards and regulations
SROs must establish and enforce guidelines for consumer protection, security and data privacy. This includes ensuring that member fintech companies comply with industry standards and relevant legal and regulatory frameworks, with the SRO empowered to investigate and take disciplinary action against members who fail to comply with these standards.
Bridging the gap between industry and regulation
SROs are expected to act as a bridge between fintech companies and the RBI, facilitating communication by channeling industry concerns and recommendations to the central bank. Additionally, SROs can support the regulatory changes needed to support responsible innovation and growth in the fintech sector.
Innovation with equity
The new framework recognizes the importance of SROs promoting innovation equitably within the sector, stating that this can be achieved by establishing minimum eligibility criteria for membership that ensure representation from a broad range of fintech companies. SROs can also fill the skills gap by providing specialized knowledge and expertise to smaller entities, as well as offering guidance and contributing to capacity building through training programs. Maintaining a repository of industry data and trends can further serve as a valuable resource for research and policy making.
THE FUNCTIONS OF AN SRO: A DEEP DIVE
The RBI has outlined a comprehensive range of functions that SROs are mandated to perform. These functions are considered key to ensuring the responsible growth and stability of the fintech sector:
Standard settings
This involves establishing a code of conduct for advertising and marketing practices, ensuring responsible behavior by fintech companies, with SROs responsible for developing basic governance standards for the industry and specifying consequences for breaches of the established rules. Data collection and storage must be carried out in strict compliance with relevant data privacy regulations.
Supervision and enforcement
Creating a resilient framework for oversight and enforcement activities is critical, and SROs must develop and implement appropriate oversight mechanisms to effectively monitor members’ compliance with regulations and standards. Maintaining data confidentiality is critical and SROs are required to establish clear standards of conduct for their members. A defined range of disciplinary actions, including warnings, reprimands and expulsions, along with financial penalties, provides SROs with the tools needed to ensure compliance.
Development
Promoting a culture of compliance in the fintech sector is a key objective of SROs. According to the RBI, this can be achieved by facilitating the exchange of expertise and best practices among members, as well as organizing training programs to improve knowledge and skills. SROs are also expected to disseminate industry-specific information through various channels to raise awareness of developments, trends and best practices in the fintech industry. Furthermore, the framework encourages SROs to actively promote research and development through studies, surveys and discussions. To ensure inclusivity, SROs are tasked with extending guidance and support to smaller fintech entities, regardless of their member status.
Complaints redressal and dispute resolution
Establishing a robust framework for addressing customer complaints and resolving disputes efficiently, fairly and transparently is a key responsibility of SROs. This includes working to educate customers about fintech products and services, conducting regular assessments of the customer service standards offered by members, and implementing regular reviews of their complaint resolution framework to ensure its effectiveness.
ELIGIBILITY FOR SRO MEMBERSHIP
Membership of an SRO is primarily open to fintech companies that are not currently regulated by any financial sector regulator and are domiciled or registered in India. The framework also allows so-called “regulated entities” (excluding banks) to join. Participation is voluntary, and while membership fees may vary based on size and ability, the RBI has made it clear that the fee structure must be reasonable and non-discriminatory. The number of SROs to be recognized will be determined based on the nature and volume of applications received by the RBI.
REGISTERING AS A SRO: THE REQUIREMENTS
To be recognized as an SRO, an entity must meet the following stringent criteria set by the RBI:
Legal structure
The SRO must be incorporated as a not-for-profit company under Section 8 of the Companies Act 2013, to ensure that the organization operates for the benefit of the industry and not for private gain.
Equity diversity
To help ensure balanced and independent decision-making within the SRO, the RBI mandates diversification of the SRO’s shareholding, with no single entity holding more than 10% of the paid-up share capital.
Financial stability
The SRO must achieve a minimum net worth of INR 20 million (GBP 190,000) within one year of receiving recognition from the RBI or before commencing operations to ensure it has the resources to effectively discharge its responsibilities.
Infrastructure and capacity
The SRO must possess the necessary infrastructure and capabilities to effectively fulfill its responsibilities in a consistent manner, including an IT infrastructure that enables the implementation of technological solutions in a timely manner.
Management of damage to users
The framework requires SROs to establish effective systems for managing “user harm” resulting from practices such as fraud, mis-selling, unfair practices, unauthorized transactions or any other form of misconduct that harms consumers of financial services.
Operations abroad
SROs are prohibited from setting up entities or offices abroad without prior approval from the RBI. This ensures regulatory oversight and maintains control over SRO activities.