The RBI sets a framework for self-regulation of the fintech sector

The Mumbai RBI has issued a final framework for self-regulatory organizations (SROs) in the fintech sector, which states that the regulator may advocate for allowing multiple SROs in the sector.

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“The RBI is going to start the process of recognizing SROs. Therefore, an application may be submitted by entities that meet or intend to meet the eligibility conditions and requirements of the SRO-FT framework. The names of the applicants eligible for ‘Recognition’ will be published on the RBI website.

“Given the dynamics of the sector, it is likely that fintechs will be able to belong to more than one SRO. Additionally, fintech entities are encouraged to participate in at least one SRO,” he added.

In January 2024, the RBI released draft norms for fintech SROs (SRO-FT), followed by industry bodies such as Digital Lenders Association of India (DLAI), Fintech Convergence Council and Fintech Association for Consumer Empowerment (FACE). . that they meet most of the designed standards and are waiting for final consent to submit applications.

“The long-awaited SRO-FT guidelines by the RBI are commendable in many respects. It recognizes many streams and companies in the fintech industry, such as digital lenders, account aggregator and P2P businesses. This provides exposed unregulated entities that are often considered the backbone of the sector. Moreover, the guidelines point to providing SRO-FT with the ability to support new products and services,” said Jatinder Handoo, CEO, DLAI.

Final framework

According to the final assumptions, the SRO’s share in the share capital should be sufficiently diversified, and no entity should hold at least 10 percent of the paid-up share capital, either alone or acting in concert. Applicants will be required to have a minimum net worth of Rs 2 crore within one year after recognition as SRO-FT or before commencement of business, whichever is earlier.

“At least one third of the board members, including the chairman, should be independent and have no active connection with the fintech entity. Moreover, the majority of independent directors are intended to represent fintechs, which are currently not directly subject to regulation,” the central bank said.

Applicants should demonstrate the ability to establish the necessary infrastructure to effectively and consistently perform the SRO-FT functions. Systems will also need to be in place to manage ‘user harm’ incidents, which may include fraud, mis-selling, unfair practices, unauthorized transactions or any other form of misconduct.

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While an SRO cannot open branches or offices outside India, fintechs based outside India can become members of the SRO.

Role and powers

Fintech SROs should operate objectively under the supervision of the RBI, should strive for healthy and sustainable growth of the sector and define a path towards progressive compliance with regulations and supervision, the RBI said, adding that SROs should ensure that its members are representative of the sector sector, including entities currently regulated by the RBI such as account aggregators and P2P lending platforms.

“SRO-FT must therefore be seen and accepted by the industry as a key standard-setting body, defining rules of conduct and ensuring voluntary adoption of the framework by its members.”

The standards added that the SRO should be development-oriented, support continuous learning and skill development, hold the hand and guide junior members, act independently and impartially from the influence of an individual member or group of members, act as a repository of information, avoid conflicts of interest , act as arbitrator in disputes and encourage members to comply with regulatory expectations.

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“The SRO-FT should have adequate powers to investigate and take disciplinary action against its members for non-compliance with the codes/standards/policies. Through active participation in the regulatory dialogue, SRO-FT should help shape a regulatory environment favorable to innovation, while ensuring consumer protection.

The Fintech SRO should develop a code of conduct for members, establish industry benchmarks and core technology standards for transparency, information disclosure and data privacy, establish standard documents for specific requirements, establish an accreditation mechanism in the fintech ecosystem, and a code of conduct for responsible advertising and market standards.

Specific observations

Responsibilities to the RBI would include providing sector-specific insights, addressing regulatory issues, collaborating on the development of the sector, fostering collaboration, ensuring policies commensurate with the dynamic nature of the sector, acting as the collective voice of its members, providing regular updates on sector developments and collecting and sharing relevant data.

“A self-regulatory pathway could enable the fintech sector to align growth with self-imposed standards, respond to peer demands and be guided by exemplary standards of conduct. Properly designed self-regulation can usher in self-discipline, ensure a high level of internal governance and create an environment conducive to the organized and orderly development of the fintech sector,” the RBI said.