TAG: GS 3: ECONOMY
THE CONTEXT: The Reserve Bank of India (RBI) has released a comprehensive framework for recognizing self-regulatory organisations (SROs) within the financial technology (fintech) sector.
EXPLANATION:
- This move aims to promote self-governance and enhance regulatory compliance among fintech entities.
- The framework delineates the criteria and operational guidelines for SROs in the fintech industry, encouraging widespread participation from various fintech firms.
Framework of Self-Regulatory Organisation in the FinTech sector (SRO-FT)
- The framework stipulates that an SRO-FT (Self-Regulatory Organisation in the FinTech sector) may include membership from fintech entities regulated by the RBI, such as non-banking financial companies-account aggregators (NBFC-AA) and NBFC-peer-to-peer (P2P) lending platforms.
- However, banks are excluded from this membership.
- The RBI envisions the possibility of multiple SRO-FTs, with fintech firms encouraged to join at least one.
- Given the dynamic nature of the fintech sector, the RBI allows for fintech entities to be members of more than one SRO.
- This flexibility aims to foster comprehensive representation and address diverse business needs within the industry.
Development and Implementation
- The final framework was released nearly five months after the RBI issued draft norms for public consultation.
- This iterative process reflects the regulator’s commitment to stakeholder engagement and the incorporation of industry feedback.
- Industry leaders have welcomed the guidelines.
- CEO of the Digital Lenders Association of India (DLAI) praised the framework for recognizing the various segments within fintech, including digital lenders, account aggregators, and P2P businesses.
- The guidelines also acknowledge the importance of non-regulated entities, often considered vital to the sector’s growth.
Application and Recognition Process
- Entities wishing to be recognized as SRO-FTs must meet specific eligibility conditions outlined by the RBI.
- This includes:
- Net Worth Requirement: A minimum net worth of Rs 2 crore within a year of recognition.
- Non-Profit Status: The entity must be a not-for-profit organization.
- Diversified Shareholding: No single entity should hold 10% or more of the SRO-FT’s paid-up share capital.
- Several organizations, such as the Payments Council of India (PCI), Fintech Association for Consumer Empowerment, and DLAI, are prominent contenders for SRO-FT status.
- These bodies are gearing up to meet the RBI’s criteria and submit their applications.
Roles and Responsibilities
- An SRO-FT will act as a bridge between the fintech industry and the regulator, setting standards for the conduct of its members.
- They are also required to establish a dispute resolution framework to handle grievances effectively.
- SRO-FTs will serve as the collective voice of their members in engagements with the RBI, addressing broader concerns of the fintech sector beyond individual member interests.
- Monitoring and Compliance
- SRO-FTs must implement robust surveillance mechanisms to monitor the fintech sector, ensuring compliance with regulatory standards.
- This involves using advanced tools and techniques to assess industry activities and detect irregularities.
- Confidentiality and Data Protection
- The RBI mandates that SRO-FTs maintain strict confidentiality of surveillance data.
- Data collection should be limited to essential information disclosed for specified purposes, ensuring privacy and data protection.
- Policy Support and Reporting
- SRO-FTs are required to keep the RBI informed about fintech developments and report any regulatory violations by their members.
- They must collect and share updated sectoral information with the RBI to assist in policymaking.
Self-Regulatory Organisation in the FinTech sector (SRO-FT):
- The Reserve Bank of India (RBI) has released a comprehensive framework for establishing Self-Regulatory Organisations (SROs) in the fintech sector, known as SRO-FTs.
- The framework aims to promote a healthy balance between innovation and regulatory compliance while protecting consumer interests.
- Key Features of SRO-FTs
- Membership: SRO-FTs should represent fintech companies of all sizes, stages, and activities, ensuring inclusivity and drawing upon the collective expertise of members to develop standards.
- Governance: SRO-FTs must be development-oriented, independent from influence, and a legitimate arbiter of disputes. The board and key managers should possess professional competence and a reputation for fairness and integrity.
- Infrastructure: SRO-FTs should have sufficient net worth and required infrastructure, including IT, to fulfill their role effectively.
- Functions: SRO-FTs are responsible for establishing and enforcing regulatory standards, promoting ethical conduct, ensuring market integrity, resolving disputes, and fostering transparency and accountability among members.