Driven by technological innovations, FinTechs are emerging as facilitators in the realm of financial services enhancing their access to the users in a time-saving and cost-effective manner. Over the years the number and activities of FinTechs have increased manifolds and so the need for providing a framework for the self-regulation has emerged in view of the rising concerns relating to customer protection, data privacy, cyber security, grievance handling, internal governance, financial system integrity, etc.
The Reserve Bank of India, after due consultation with the concerned stakeholders has recently released a comprehensive framework for recognizing Self-Regulatory Organizations for the fintech sector (SRO-FT), which includes, inter-alia, broad functions, governance standards, eligibility criteria and expectations for grant of recognition as an SRO-FT.
The SRO-FT is going to be an industry-led entity responsible for:
- establishing and enforcing regulatory standards,
- promoting ethical conduct,
- ensuring market integrity,
- resolving disputes, and
- fostering transparency and accountability among its members.
The SRO-FT must be perceived and accepted by the FinTech industry as the key body for setting standards, defining rules of conduct and ensuring voluntary adoption of the framework by its members. Given the dynamics of the sector, it is likely that FinTechs could have membership of more than one SRO. Furthermore, the FinTech entities are to be encouraged to participate in at least one SRO.
High level of Innovation requires industry-centric regulation
The FinTechs are constantly introducing newer applications and methods to provide better and more cost-effective services to the users. On one hand there is need to regulate this dynamic sector, yet, on the other hand, the approach to regulation also needs to be imaginative, adaptive, flexible, and proportionate to the perceived risks. Hence, it is desirable to have a judicious balance between the need to maximize the creative potential of FinTechs on one hand, and minimizing the idiosyncratic risks they pose to the financial system, on the other.
The oversight framework should therefore be activity-based, risk-based, scale-based and phased-in as well. Hence, self-regulation within the FinTech sector appears to be one way of achieving this delicate balance. By pivoting towards a culture of self-governance, FinTechs could proactively set and adhere to industry standards and best practices and demonstrate their commitment towards responsible conduct and innovation even in the absence of formal regulation.
Self-regulation seems to be the best choice
The Fintech industry is being encouraged to collectively identify and address challenges, foster an environment where innovation flourishes along with shared commitment to ethical business practices. Self-regulation has its own merits:
- to respond to rapid technological advancements and evolving market dynamics
- to enable the FinTech sector to align growth with self-imposed standards,
- to be answerable to peer demands,
- to be guided by exemplary conduct
- To usher in self-discipline,
- to imbibe high levels of internal governance and
- to foster an environment conducive to an organized and orderly development of the FinTech sector.
FinTech SRO – Characteristics and Operations
The SRO-FT framework shall operate objectively with credibility and responsibility under the oversight of Reserve Bank of India (RBI) to achieve healthy and sustainable development of the FinTech sector and it could as well identify a glide path to a phased regulatory and / or supervisory compliance. The SRO-FT should have, inter-alia, the following characteristics :
True Representation of the FinTech Sector:
The SRO-FT shall ideally be representative of the FinTech sector comprising of FinTechs that operate across various domains, including the ones that are currently regulated by the RBI (e.g., NBFC-Account Aggregators, NBFC-Peer to Peer Lending Platforms, etc.) but excluding banks. This representative structure should foster inclusivity and enable the SRO-FT to draw upon the collective expertise and experience of its members, resulting in development of standards that are pragmatic, adaptive, and widely accepted within the FinTech community.
Development-oriented:
The SRO-FT shall be development-oriented, actively contributing to the growth and evolution of the industry, prescribing minimum eligibility criteria for its members, providing specialized knowledge and expertise, offering guidance, and contributing to capacity-building through training programs to foster continuous learning and skill development.
Independence from Influence:
The SRO-FT shall operate independently as a neutral and reliable entity so that they maintain impartiality, avoid conflicts of interest, and ensure unbiased oversight over its members.
Legitimate Arbiter of Disputes:
The SRO-FT shall be viewed upon as a legitimate arbiter of disputes and so it should be able to evolve a transparent and fair resolution mechanism for disputes arising among members fostering a more stable and harmonious FinTech environment.
Encouraging Members to Subscribe to Regulatory Expectations:
The SRO-FT shall facilitate communication between industry p RBI, advocating for necessary changes, and promoting a culture of compliance and shall have adequate powers to investigate and take disciplinary action against its members for non-adherence to codes / standards / rules.
Repository of Information:
The SRO-FT shall collect, analyse, and disseminate relevant data pertaining to the activities of its members promoting industry research, trend analysis, and policy making. The SRO-FT shall be encouraged to set-up a repository containing all such information relating to the FinTechs that are part of its membership and thus contribute to the overall development and resilience of the FinTech sector.
FinTech SRO – Eligibility and Membership
General Requirements
- The applicant should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. The shareholding of the SRO should be sufficiently diversified, and no entity should hold 10% or more of its paid-up share capital, either singly or acting in concert.
- The Memorandum of Association (MoA) should explicitly state the operation as an SRO-FT as its primary objective.
- The applicant should have a minimum net worth of Rupees two crore within a period of one year after recognition as an SRO-FT by RBI, or before commencement of operations as an SRO-FT, whichever is earlier.
- The SRO-FT should have a robust IT infrastructure and the ability to deploy technological solutions within a reasonable timeframe.
- The SRO-FT should put in place systems for managing ‘user harm’ instances (such as fraud, mis-selling, unfair practices, unauthorized transactions, or any other form of misconduct) that come to its notice or are referred to it by the RBI or any other stakeholder.
- The SRO-FT should not set up entities / offices overseas without the prior approval of the RBI.
Membership Criteria
- The applicant SRO-FT should represent the FinTech sector with membership across entities of all size, stage and activities.
- If representation is inadequate at the time of application, a roadmap should be included for achieving this within a reasonable timeline. Failure to demonstrate or attain comprehensive membership would result in refusal or revocation of recognition.
- Membership of the SRO-FT should comprise of members who are FinTechs, and membership should be voluntary.
- The SRO-FT should be an entity domiciled / registered in India.
- The SRO-FT could have FinTechs domiciled outside India as members.
- The membership fee structure developed by the SRO-FT should be reasonable, and non-discriminatory.
- The SRO-FT should derive authority through the membership agreements to set rules, standards, codes of conduct, etc., for its members.
- FinTechs would be encouraged by the RBI to become member of a recognized SRO-FT.
Fit and Proper Criteria of Board of Directors and Key Managerial Personnel
- The Board of Directors (BoD) and Key Managerial Personnel (KMP) should possess professional competence and a reputation for fairness and integrity.
- Any legal proceeding against the SRO-FT, BoD or KMP shall be declared as part of the application and demonstrated that such proceedings do not impede the functioning of the SRO-FT or harm its reputation. Further, the applicant, any members of the BoD or any KMP should not have been convicted of any offence including moral turpitude / economic offence in the past.
- RBI’s views on the fit and proper status of the SRO-FT, BoD and KMP would be final.
While granting recognition as SRO-FT, the RBI would, if deemed necessary, prescribe such other conditions as may be required to ensure that functioning of the SRO-FT does not become detrimental to public interest. For related and complete details on SRO-FT, the readers are advised to refer to the “Framework for Recognising Self-Regulatory Organisation(s) for FinTech Sector” released by the RBI dated 30.05.2024.