Background
On January 15, 2024, the Reserve Bank of India (“RBI”) released a preliminary framework concerning Self-Regulatory Organisations (“the draft framework”) in the FinTech Sector. This framework puts forth suggestions addressing the intricacies of regulating FinTechs, outlining the attributes of a FinTech Self-Regulatory Organisation (“SRO-FT”), along with its operational functions, governance norms, and qualification criteria.
Scope
The draft framework extends to all FinTechs.
Key Points of the Preliminary Framework:
Regulatory Challenges of FinTechs
The preliminary framework raises pertinent issues regarding the regulatory complexities surrounding FinTech operations. It underscores that while technological advancements bring about positive shifts in financial services, concerns related to customer safeguarding, data confidentiality, cyber defense, complaint resolution, internal management, and financial system reliability are inevitable. Hence, the preliminary framework advocates for self-regulation within the FinTech domain. Through this self-regulatory approach, FinTech entities can establish standards and best practices independently, showcasing their dedication to ethical conduct and innovation despite the absence of formal regulation. Thus, through this preliminary framework, the RBI offers guidelines on how these self-governing FinTech entities can function effectively.
Attributes of an SRO-FT
The preliminary framework delineates six fundamental attributes expected of an SRO-FT:
- Representative character of the FinTech Sector: This remark emphasizes how crucial it is for the SRO-FT to have a robust and representative membership. It is recommended that the SRO-FT seek to engage in membership agreements with a diverse range of stakeholders in order to establish realistic and widely recognized guidelines, policies, and optimal procedures. Through promoting inclusion and utilizing group knowledge, the SRO-FT may establish credibility and successfully govern the FinTech sector. It aims to be the central authority for industry standards and conduct, encouraging voluntary compliance among its members. This aspect underscores the significance of a robust and inclusive membership within the SRO-FT. It suggests that the SRO-FT should engage with a diverse array of stakeholders to formulate realistic and widely accepted guidelines, policies, and optimal procedures. By promoting inclusivity and leveraging collective expertise, the SRO-FT can establish credibility and effectively oversee the FinTech sector. It aims to serve as the central authority for industry standards and behavior, fostering voluntary compliance among its members.
- Facilitating FinTech Industry Growth: Through educational initiatives, the SRO-FT should aim to impart knowledge, skills, and guidance in a developmental context. It should also outline the minimum eligibility requirements for membership. This aspect is crucial as it enables the SRO-FT to bridge skill gaps and provide much-needed support and direction to nascent enterprises regarding the ever-evolving industry landscape and regulatory frameworks.
- Impartial SRO-FT: The SRO-FT must remain impartial and reliable, avoiding conflicts of interest and undue influence from dominant stakeholders
- Equitable and Transparent Conflict Resolution Mechanism: Ensuring fair and transparent conflict resolution is paramount for the SRO-FT. Apart from fostering confidence among involved parties, this would establish the SRO-FT as a credible arbiter of disputes.
- Regulatory Compliance: The SRO-FT should cultivate a culture of regulatory compliance among stakeholders, with mechanisms in place to address non-compliance. Furthermore, there should be open communication channels facilitating stakeholder engagement and adaptation to regulatory changes as needed.
- Data Repository: The SRO-FT should focus on collecting, analyzing, and disseminating data related to its members’ activities. This data could serve as a valuable resource for research, analysis, and policy formulation in the FinTech sector.
General Requirements
To qualify for SRO-FT membership, the applicant must: a) be a non-profit entity under Section 8 of the Companies Act, 2013; b) include operation as an SRO-FT in its Memorandum of Association; c) possess adequate IT infrastructure and net worth; d) have mechanisms to address instances of user harm; and e) obtain RBI approval before establishing entities overseas
Membership Criteria
Membership criteria entail: a) ensuring representation of the FinTech sector across entities of varying sizes, stages, and activities; b) encouraging FinTech participation in the SRO-FT; c) mandating Indian domicile for the SRO-FT while allowing foreign domicile for its members; d) stipulating reasonable membership fees; and e) formulating a code of conduct through membership agreements.
Fit and Proper Assessment for Board and Key Personnel
Fit and proper criteria include: a) competency and integrity of the Board of Directors (“BoD”) and Key Managerial Personnel (“KMP”); b) disclosure of ongoing legal proceedings against the applicant, BoD, or KMP, with assurance that such proceedings won’t tarnish the SRO-FT’s reputation; and c) absence of convictions for offenses involving moral turpitude or economic crimes.
Application Process
The application submitted to the RBI should include: a) MoA and Articles of Association copies; b) details of the applicant’s board and their roles; c) if necessary, a roadmap demonstrating comprehensive membership achievement; d) board-authorized application submission; and e) any additional information required by the RBI. In case of rejection, the applicant shall have the opportunity to present their case
SRO-FT Recognition
The RBI will issue a recognition letter to the SRO-FT if: a) submitted information is accurate and non-misleading; b) ongoing adherence to framework requirements is assured; c) periodic review by the RBI is accepted; d) actions contrary to public interest or SRO-FT objectives warrant recognition withdrawal; and e) compliance with all RBI regulations is maintained
Functions of the SRO-FT
The functions of the SRO-FT include:
- Establishing Standards: Playing a pivotal role in setting and enforcing industry standards, including transparent rule-making processes and tailored codes of conduct. Additionally, the SRO-FT will define industry benchmarks for transparency, data privacy, and technological standards. To promote ethical practices, standardized documentation, accreditation mechanisms, and responsible advertising guidelines will be developed
- Supervision and Enforcement: Implementing a robust oversight and enforcement mechanism, leveraging technology to monitor industry activities and guide against detrimental practices, thereby ensuring sectoral growth
- Development of the FinTech Industry: Serving as a knowledge repository, educating members on regulations, sharing best practices, and fostering innovation through research and development. Support and guidance, particularly for smaller entities, will be provided to ensure a thriving FinTech ecosystem.
- Grievance Redressal: Establishing a mechanism for grievance redressal and dispute resolution among members, while also educating customers on sector offerings
Conclusion
RBI’s draft framework for SROs in the FinTech sector aims to promote self-regulation, responsible conduct, and innovation among FinTechs while addressing regulatory challenges.
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