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Draft Omnibus Framework for recognising Self-Regulatory Organisations for Regulated Entities

Reserve Bank of India (RBI) has released draft omnibus framework for recognising Self-Regulatory Organisations for its regulated entities.

What is the need of Self-Regulatory Organisations for Regulated Entities?

With the growth of Regulated Entities (REs) in terms of number as well as scale of operations, increase in adoption of innovative technologies and enhanced customer outreach, a need is felt to develop better industry standards for self-regulation.

Self-Regulatory Organisations (SROs) enhance the effectiveness of regulations by drawing upon the technical expertise of practitioners and also aid in framing / fine-tuning regulatory policies by providing inputs on technical & practical aspects, nuances and trade-offs involved. 

To whom shall the omnibus SRO framework be applicable?

The omnibus SRO framework will be common for all SROs, irrespective of the sector.

Existing SROs already recognized by Reserve Bank of India (RBI) shall continue to be governed by the terms and conditions under which they were recognized, unless the omnibus framework is specifically extended to such SROs.

What shall be the characteristics of SROs for REs?

An SRO is expected to operate under the oversight of the regulator and is expected to have the following characteristics –

  • The SRO should have sufficient authority which is derived from membership agreements to set ethical, professional and governance standards and enforce these standards on the members. It should have strong governance mechanisms, including focus on independent board, transparency, and adherence to well-defined processes.
  • The SRO should have objective, well-defined and consultative processes to make rules relating to conduct of its members and shall be able to enforce these rules. SROs should also put in place well-defined and transparent processes and procedures for overseeing activities of their members. It should establish clear standards of conduct and specify consequences for violation of agreed rules / codes.
  • The SRO should develop standards for improving compliance culture and adherence by its members to the rules and regulations framed by RBI.
  • The SRO should devise and implement standardised procedures for handling disputes among members, including processes to resolve these disputes through a transparent and consistent dispute resolution / arbitration mechanism.
  • The SRO should have suitable surveillance methods for effective monitoring of the sector.

What shall be the objectives of SROs?

  • SRO shall promote a culture of compliance among its members. SRO shall extend guidance and support, particularly to smaller entities within the sector, and share best practices aligned with statutory and regulatory policies. For this purpose, the SRO should frame and implement a comprehensive code of conduct for its members.
  • The SRO shall act as the collective voice of its members in engagements with RBI, government authorities or other regulatory and statutory bodies. It is expected that the SRO functions above the self-interests and addresses larger concerns of the industry and financial system as a whole. While acting as the industry representative, the SRO is expected to ensure equitable and transparent treatment for all its members.
  • SROs shall collect and share relevant sectoral information to RBI to aid in policymaking. 
  • SRO shall encourage a culture of research and development within the sector to encourage innovation while ensuring highest standards of compliance and self-governance.

What shall be the eligibility criteria for SROs?

  • The applicant shall be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. 
  • The applicant must have adequate net-worth and should possess or have the ability to create infrastructure to enable it to discharge responsibilities of an SRO on a continuing basis.
  • The applicant must represent the sector and have the specified membership or should have submitted roadmap for attaining specified membership within a reasonable timeline.
  • The applicant and its directors must have the professional competence, be financially sound and have general reputation of fairness and integrity to be established to the satisfaction of RBI. 
  • The applicant must be fit and proper for the grant of recognition as an SRO, in all other respects. 

What shall be the criteria for membership of SROs?

  • SRO operates as a true representative of the sector and its members and shall have a good mix of members at all levels to represent the sector holistically. 
  • The minimum membership that may be prescribed by RBI shall be attained ideally at the time of making an application or within such a timeline as prescribed by RBI but not exceeding 2 years, from the date of grant of recognition. Failure to achieve specified membership within the timeline could result in revocation of the recognition granted.
  • The membership of SRO shall be voluntary for the members.

What shall be the criteria for the Board of SROs?

At least 1/3rd of members in the Board of Directors including the chairperson shall be independent and without any active association with the category / class of REs for which the SRO is established. 

What shall be the responsibilities of SROs towards RBI?

  • The SRO shall keep RBI regularly informed of the developments in the sector. It shall also promptly inform RBI about any violation by its member of the provision of the Acts or the rules / guidelines / regulations / directions issued by RBI, which comes to its notice.
  • The SRO shall carry out any work assigned to it by RBI and examine the proposal or suggestion referred to it. It shall provide data / information, sought by RBI periodically or as advised.
  • The SRO should submit its Annual Report to RBI, within 3 months of completion of the accounting year. The SRO shall also submit the periodic / adhoc returns as may be prescribed by RBI.
  • The SRO may be invited for periodic interactions with RBI and is expected to look at the larger picture of the industry / segment in offering its views / inputs / suggestions.
  • The SRO shall discharge such other functions and also abide by such other directions as specified by RBI, from time to time.
  • RBI may inspect the books of the SRO or arrange to have the books inspected by an audit firm. The expenses of such inspection shall be borne by the SRO.

How shall the application of SROs be processed?

  • An entity aspiring to function as an SRO shall be required to make an application to RBI for recognition.
  • Where the applicant is deemed suitable, RBI would proceed to issue a “Letter of Recognition” as the SRO.


References

Reserve Bank of India. (2023, December 21). 'Draft Framework for comments Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs) of the Reserve Bank of India'. Retrieved from https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1247

Reserve Bank of India. (2023, December 21). 'RBI invites comments on the ‘Draft Omnibus Framework for recognising Self-Regulatory Organisations for its Regulated Entities'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56969


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