RBI issues framework for fintech sector self-regulation
Mumbai The RBI has issued the final framework for self-regulatory organisations (SRO) in the fintech sector, which indicates that the regulator may be in favour of allowing multiple SROs for the sector.
“The RBI intends to initiate the process of recognising SRO(s). Accordingly, entities meeting or intending to meet the eligibility conditions and requirements of the SRO-FT framework may submit an application. The name(s) of applicant(s) found eligible for “Recognition” will be published on the website of RBI.”
“Given the dynamics of the sector, it is likely that fintechs could have membership of more than one SRO. Furthermore, the fintech entities are encouraged to participate in at least one SRO,” it added.
The RBI, had in January 2024, issued the draft norms for fintech SRO (SRO-FT) following which industry bodies such as Digital Lenders’ Association of India (DLAI), Fintech Convergence Council and Fintech Association for Consumer Empowerment (FACE) had said that they comply with most of the draft norms and are waiting for the final go ahead to submit their applications.
“The much-awaited SRO-FT guidelines by the RBI are laudable on many accounts. It recognises the multiple streams and businesses in fintech, such as digital lenders, account aggregator and P2P business. It gives prominence to the non-regulated entities who are often considered the backbone of the sector. Further, the guidelines points towards providing the SRO-FT with capabilities to support new-products and services,” said Jatinder Handoo, CEO, DLAI.
Final framework
As per the final framework, the shareholding of the SRO should be sufficiently diversified, and no entity should hold 10 per cent or more of its paid-up share capital, either singly or acting in concert. Applicants will need to have minimum net worth of ₹2 crore within one year after recognition as an SRO-FT or before commencement of operations, whichever is earlier.
“At least one-third of members in the board, including the chairperson, should be independent, and without any active association with a fintech entity. Further, majority of non-independent directors are to be representative of fintechs that are currently not directly regulated,” the central bank said.
Applicants should demonstrate the capability of establishing necessary infrastructure to act as an SRO-FT, effectively and consistently. It will also need to put in place systems for managing ‘user harm’ instances which may include fraud, mis-selling, unfair practices, unauthorised transactions, or any other form of misconduct.
While the SRO can’t open branches or offices outside India, fintechs domiciled outside India can become members of an SRO.
Role and eligibility
A fintech SRO should operate objectively under the oversight of RBI, should strive towards healthy and sustainable development of the sector, and identify a glide path to a phased regulatory and supervisory compliance, RBI said, adding that SROs should ensure its members are representative of the sector, including entities that are currently regulated by RBI such as account aggregators and P2P lending platforms.
“The SRO-FT must thus be looked up to and accepted by the industry as the key body for setting standards, defining rules of conduct and ensuring voluntary adoption of the framework contours by its members.”
The norms added that the SRO should be development-oriented, foster continuous learning and skill development, hand hold and guide younger members, operate independently and impartially from the influence of any single member or group of members, act as a repository of information, avoid conflicts of interest, act as an arbiter of disputes, and encourage members to subscribe to regulatory expectations.
“The SRO-FT should have adequate powers to investigate and take disciplinary action against its members for non-adherence to codes / standards / rules. By actively participating in the regulatory dialogue, the SRO-FT should help in shaping a regulatory environment that is conducive to innovation, while ensuring consumer protection.”
A fintech SRO should frame a code of conduct for members, set industry benchmarks and baseline technology standards for transparency, disclosure and data privacy, set standardised documents for specific requirements, set up a mechanism for accreditation in the fintech ecosystem and a code of conduct for responsible advertisements and market standards.
Specific insights
Responsibilities towards RBI would include relaying sector-specific insights, addressing regulatory concerns, collaborate on development of the sector, foster co-operation, provide policy commensurate to the dynamic nature of the sector, act as the collective voice of its members, provide regular updates on sector developments, and collect and share relevant data.
“The path of self-regulation could enable the fintech sector to align growth with self-imposed standards, be answerable to peer demands, and be guided by exemplary conduct norms. Appropriately designed, self-regulation can usher in self-discipline, imbibe high levels of internal governance and foster an environment conducive to an organised and orderly development of the fintech sector,” the RBI said.