23 January 2024

Draft Framework For Self-Regulatory Organisation (S) In The FinTech Sector

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The Reserve Bank of India ("RBI") vide its press release dated 15th January 2024, announced the release of the Draft Framework for Self-Regulatory Organisation (s) in the FinTech Sector
India Technology
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The Reserve Bank of India ("RBI") vide its press release dated 15th January 2024, announced the release of the Draft Framework for Self-Regulatory Organisation (s) in the FinTech Sector ("Draft Framework"). The Draft Framework is open for public and stakeholder consultations till end of February 2024.

The Draft Framework is aimed at creating and promoting a "self-regulatory" approach through which RBI can maximize on the creative abilities of FinTechs while simultaneously minimizing the idiosyncratic risks they pose to the financial system. To achieve this balance, RBI has proposed creation of a Self-Regulatory Organisation ("SRO") which upon receiving formal recognition (not a necessary condition) shall become a FinTech SRO ("SRO-FT").

Eligibility Criteria's: The conditions as enumerated in the Draft Framework for an SRO to qualify as an SRO-FT is as follows:

a) The applicant should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013.

b) To ensure clarity and transparency about the organization's purpose and operations, the Memorandum of Association ("MoA") of the applicant company should explicitly state the operation as an SRO-FT as one of its primary objectives.

c) The applicant should have a sufficient net worth and demonstrate the capability of establishing the required infrastructure for effectively and consistently fulfilling the responsibilities of SRO-FT. In this regard, the SRO-FT should have a robust IT infrastructure and the ability to implement technological solutions within a reasonable timeframe.

d) The SRO-FT should establish mechanisms for handling instances of 'user harm' that come to its attention or are referred to it by the Reserve Bank or any other stakeholders.

e) Applicant SRO-FT should represent the FinTech sector with voluntary membership across entities of all size, stage and activities (or the application should have a future roadmap to achieving such membership within reasonable time).

f) SRO-FT should be an entity domiciled/ registered in India with members from anywhere.

g) SRO-FT's membership fee shall be reasonable and non-discriminatory.

h) SRO-FT's shall derive authority from membership agreements to set the rules, standards, codes of conducts etc. for the members.

i) The Board of Directors ("BOD") and Key Managerial Personnel ("KMP") shall possess professional competence, have a general reputation of fairness and integrity, and should not have been convicted of any offence including moral turpitude/ economic offence. Any legal proceeding against the applicant company, BOD and KMP shall be declared as part of the application and demonstrated that such proceedings would not impede functioning or harm reputation of the company.

In case any applicant company is deemed suitable, RBI shall issue a "Letter of Recognition" to the SRO-FT which shall be subject to periodic review by RBI. Such recognition shall be revoked (subject to opportunity of being heard) in case RBI considers that the functioning of SRO-FT is detrimental to the public or if activities are not in conformity with objectives of SRO-FT.

Functions and Responsibilities: The Draft Framework enumerates the following functions of an SRO-FT within the FinTech sector:

  1. Standard-setting: The Draft Framework proposes that the SRO-FT shall have objective, well-defined and consultative processes to make and establishes rules and standards. The SRO-FT should set industry benchmarks and baseline technology standards for transparency, data privacy etc. by its members. SRO-FT shall formulate standard documents, accreditation mechanisms, and governance standards for the FinTech sector, put in place code of conduct for responsible advertisements and market standards and should also specify the consequences for violation of agreed upon misconduct and violation.
  2. Oversight and Enforcement: The Draft Framework proposes that SRO-FT's should establish structured frameworks for its oversight and enforcement functions. It should also implement surveillance mechanisms to monitor the sector effectively, using tools to assess industry activities and ensure proactive integrity and compliance. Additionally, the SRO-FT should provide guidance on practices that could hinder the sector's growth, promoting healthy and sustainable development.
  3. Developmental Initiatives: The Draft Framework provides that the SRO-FT's should actively promote understanding and compliance with statutory and regulatory requirements, facilitating knowledge exchange and organizing training programs for its members. It should also disseminate sector-specific information through various channels to raise awareness about developments and best practices. Additionally, the SRO-FT should encourage research and development in the FinTech sector, conducting studies and providing guidance and support to smaller entities, regardless of membership, while publicly sharing best practices aligned with regulations.
  4. Grievance Redressal and Dispute Resolution: The Draft Framework provides that the SRO-FT's should set up efficient, fair, and transparent grievance redressal and dispute resolution frameworks for its members. Additionally, it should prioritize customer education on industry products and services to enhance consumer understanding.

In addition to these functions, the Draft Framework obligates an SRO-FT to be responsible towards the RBI for the following:

  1. Collective Engagement: The SRO-FT shall act as the collective voice of its members in engagements with the Reserve Bank, addressing larger concerns of the FinTech sector beyond individual interests.
  2. Information Sharing and Compliance: The SRO-FT shall provide regular updates to the RBI on sector developments and member violations, collecting relevant sectoral information, and coordinating the introduction of new products within the regulatory framework.
  3. Consultation and Cooperation: Consulting with the Reserve Bank on developing and updating the taxonomy for FinTechs, carrying out assigned tasks, reviewing proposals, and supplying requested data as directed.
  4. Reporting and Interaction: Submitting annual reports and periodic returns to the Reserve Bank, participating in periodic interactions, and offering a holistic perspective on the FinTech sector.
  5. Regulatory Oversight: The SRO-FT shall be obligated to allow RBI to inspect their books of audits by the RBI and abide by such other directions of RBI.

Impact assessment:

The proposed SRO-FT in the Draft Framework is a welcomed initiative for FinTech companies, as it will provide them with valuable guidance in the future. Under this framework, FinTech firms are expected to benefit from the SRO-FT's role as an intermediary, facilitating communication between its members and regulatory bodies like the RBI. This collaborative approach aims to effectively address industry-specific issues and create a regulatory environment that accounts for the unique challenges of the FinTech sector. Furthermore, the planned training and awareness programs will help members stay updated on industry developments and comply with regulations. Moreover, consumers are also expected to benefit from the SRO-FT, as it will set ethical standards and ensure responsible operations among member firms, thereby protecting consumer interests.

Despite recognizing the positive aspects of the framework, there are critical gaps that need to be addressed in the future. As members of the SRO-FT, it will be crucial to ensure the inclusion of entities offering diverse FinTech products, backend technology providers, merchants, consumers, and consumer associations. Given the diverse and disruptive nature of contemporary FinTech companies, it will be imperative to ensure adequate representation of various stakeholders to effectively achieve the framework's goals. Furthermore, the proposed independent nature of the SRO-FTs will need to be tested in the future. This is especially important considering the level of oversight bestowed upon the RBI by the framework, which raises concerns about potential undue intervention in the SRO-FTs' operations. While the framework grants the RBI authority to approve key positions on the SRO-FTs' Board of Directors, it also allows for the withdrawal of SRO-FT recognition if the RBI deems its functioning contrary to public interest. In contrast, other self-regulatory organizations in India, such as ASCI and IBF, enjoy greater autonomy in appointing management personnel and general functioning. Exercising caution will be crucial to prevent the evolution of the self-regulatory framework into a pseudo-regulatory entity in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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