Reserve Bank of India (RBI) has released draft framework for recognising Self-Regulatory Organisations for FinTech Sector.
What is the need of Self-Regulatory Organisations for FinTech Sector?
FinTechs play a pivotal role in redefining financial services by saving time, enhancing access, and lowering costs. At the same time, the sector raises concerns relating to customer protection, data privacy, cyber security, grievance handling, internal governance, financial system integrity, and the like.
An effective regulatory approach should maintain the balance between maximising the creative potential of FinTechs, while minimising the idiosyncratic risks they pose to the financial system. Self-regulation within the FinTech sector could be one way of achieving this delicate balance.
What shall be the characteristics of Self-Regulatory Organisations for FinTech Sector?
The Self-Regulatory Organisations for FinTech Sector (SRO-FT) is expected to operate under the oversight of the regulator. The SRO-FT is expected to have the following characteristics –
- True Representative of the FinTech Sector – The SRO-FT would derive its strength from its membership, ensuring that it is truly representative of the FinTech sector. Through comprehensive membership agreements that encompass a broad spectrum of industry players, the SRO-FT should gain the legitimacy and credibility to not only frame baseline standards and rules of conduct codes, but also to effectively monitor and enforce them.
- Development-oriented – The SRO-FT should be development-oriented, actively contributing to the growth and evolution of the industry. This involves providing specialised knowledge and expertise, offering guidance, and contributing to capacity building through training programs, and prescribing minimum eligibility criteria for its members.
- Independence from Influence – To maintain credibility, the SRO-FT should operate independently, free from the influence of any single member or group of members.
- Legitimate Arbiter of Disputes – Members should perceive the SRO-FT as a legitimate arbiter of disputes. This would require a transparent and fair resolution mechanism for disputes arising among members that instils confidence in the FinTech industry.
- Encouraging Members for Adherence to Regulatory Priorities – A proactive SRO-FT should be capable of motivating its members to align with regulatory priorities. This would involve facilitating communication between industry players and regulatory bodies, advocating for necessary changes, and promoting a culture of compliance. The SRO-FT, as its duty towards ensuring compliance, should be empowered to investigate and take disciplinary action against its members for non-adherence to codes / standards / rules.
- Repository of Information – As a repository of information, the SRO-FT should collect, analyse, and disseminate relevant data pertaining to its members' activities.
What shall be the eligibility criteria for SRO-FT?
- The applicant should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013.
- The Memorandum of Association (MoA) of the applicant company should explicitly state the operation as an SRO-FT as one of its primary objectives.
- The applicant should have sufficient net worth and demonstrate the capability of establishing the necessary infrastructure to fulfil the responsibilities of SRO-FT effectively, and consistently.
- The SRO-FT should put in place systems for managing ‘user harm’ instances that come to its notice or are referred to it by Reserve Bank of India (RBI) or any other stakeholder.
- The SRO-FT should not set up entities / offices overseas without the prior approval of RBI.
What shall be the criteria for membership of SRO-FT?
- 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, the application should include a roadmap for achieving this within a reasonable timeline. Failure to demonstrate or attain comprehensive membership could result in denial or revocation of recognition.
- Membership of the SRO-FT should comprise of members who are FinTechs, and membership should be voluntary. FinTechs would be encouraged by RBI to become member of a recognised SRO-FT.
- The SRO-FT should be an entity domiciled / registered in India. It could have FinTech members domiciled anywhere.
- 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 the members.
- The Board of Directors (BoD) and Key Managerial Personnel (KMP) should possess professional competence and have a general reputation for fairness and integrity.
- The Board should put in place a framework for the ongoing monitoring of 'fit and proper' status of its directors. Any change in the directorship or adverse change in its fit and proper status, should be immediately reported to RBI.
- At least 1/.3rd of members in the Board, including the chairperson, should be independent, and without any active association with a FinTech entity.
- RBI would, if it deems necessary, nominate / depute Observers on the Board of the SRO-FT.
What shall be the responsibilities of SRO-FT towards RBI?
- The SRO-FT should act as the collective voice of its members in engagements with RBI. In such engagements, it would be expected that the SRO-FT functions beyond the self-interest of specific members and addresses larger concerns of the FinTech sector. Also, while acting as the industry association, the SRO-FT would be expected to ensure equitable and transparent treatment for all its members.
- The SRO-FT would be obligated to regularly update RBI on the developments in the sector and notify RBI of any violations by its members regarding statutory or regulatory requirements that may concern RBI as soon as such violations come to its attention.
- The SRO-FT should collect relevant and up to date sectoral information and share the same with RBI to aid in policy making. The SRO-FT should, where required, co-ordinate the introduction of new products within the regulatory framework set by RBI.
- The SRO-FT should consult RBI in developing and updating the taxonomy for FinTechs.
- The SRO-FT should carry out any assigned tasks from RBI, review referred proposals or suggestions, and supply requested data / information as directed by RBI.
- The SRO-FT would be required to submit its Annual Report and / or other information to RBI. Additionally, the SRO-FT should submit periodic returns as may be prescribed by RBI.
- The SRO-FT would be invited for periodic interactions with RBI and be expected to adopt a holistic perspective on the FinTech sector when providing its views, inputs, or suggestions.
- RBI could inspect the books of the SRO-FT or arrange to have the books audited by an audit firm. The expenses of such inspection would be borne by the SRO-FT.
- The SRO-FT should discharge such other functions and abide by such other directions as specified by RBI, from time to time.
- The SRO-FT would be expected to guide / facilitate RBI on the extent, scope, and manner of regulation of entities in the FinTech sector.
How shall the application of SRO-FT be processed?
- RBI would invite applications for the SRO for the FinTech sector, either for the entire sector or for specific sub-sectors, as and when required.
- The number of SRO-FTs to be recognised would be considered based on the number and nature of applications received.
- Where the applicant is deemed suitable, RBI would issue a “Letter of Recognition” to the SRO-FT.
References
Reserve Bank of India. (2024, January 15). 'Draft Framework for recognising Self-Regulatory Organisations for FinTech Sector'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57127
Reserve Bank of India. (2024, January 15). 'Draft Framework for Self-Regulatory Organisation(s) in the FinTech Sector'. Retrieved from https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1260
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