The Reserve Bank presents a comprehensive framework for self-regulatory organizations in the fintech sector

The Reserve Bank of India (RBI) released a framework for self-regulatory organizations (SROs) for the fintech sector on May 30. According to the guidelines, SROs should be development-oriented, true representatives and legitimate arbiters of disputes.

Local government organizations in the fintech sector should also be independent of influence, encouraging members to comply with regulatory expectations and acting as a repository of information, he added. The supervisory framework should be activity-based, risk-based, scale-based and phased in, the RBI said.

Self-Regulatory Organizations (SROs) will be industry-led and responsible for setting and enforcing regulatory standards, promoting ethical conduct, ensuring market integrity, resolving disputes, and supporting transparency and accountability among their members.

The RBI has asked SROs to rely on a “representative” structure, which would enable it to benefit from the collective knowledge and experience of its members, leading to the development of standards that are pragmatic, adaptive and widely accepted in the fintech community.

SROs were asked to motivate their members to align with regulatory priorities and facilitate communication with the regulator, i.e. the Reserve Bank.

The shareholding structure of an SRO company should be sufficiently diversified and no entity, either alone or acting in concert, should hold 10 percent or more of the paid-up share capital. The central bank has stated that fintechs based outside India can be members of the SRO.

The SRO-FT should implement systems to manage “user detriment” cases notified or brought to its attention by the RBI or any other interested party. Instances of user harm may include fraud, fraudulent selling, unfair practices, unauthorized transactions or any other form of misconduct that harms consumers of financial services.

SRO-FT should not establish entities/offices abroad without prior approval of RBI.

SRO-FT members should primarily be fintechs, which are currently not regulated by any financial sector regulatory body. Membership may also be open to regulated entities (other than banks).

The number of recognized SRO-FTs will be considered based on the number and nature of applications received.

Supervision and enforcement

• Financial technology companies should be encouraged to report their various activities to the SRO-FT.
• The SRO-FT should have an organized framework to guide its supervisory and enforcement functions. The core supervisory standards and framework should meet regulatory expectations.
• It should implement appropriate supervisory mechanisms to effectively monitor the fintech sector to detect and highlight exceptions. This should include the use of tools and techniques to evaluate the performance of industry participants.
• However, SRO-FT should ensure strict confidentiality of surveillance data and limit data collection to necessary information disclosed to fintechs for specific purposes.
• It should establish clear standards of conduct and define consequences for violating established rules/codes, such as counseling, warning, reprimand and expulsion of members. It may be noted that such consequences, if they involve a monetary penalty, must be ensured that they are reasonable and not prohibitive.
• The SRO-FT would have the power to block/remove any fintech entity as a member for a period specified by it or indefinitely if circumstances so require.

On January 15, 2024, the central bank published the “Draft framework for the recognition of self-regulatory organizations (SROs) for the FinTech sector”, inviting interested parties to submit comments and opinions.