RBI's Vision for Fintech Governance
The Reserve Bank of India's ("RBI") proposed framework for Self-Regulating Organisations ("SROs") in the fintech sector and for market participants who are not regulated by the RBI.1 The RBI's approach reflects its acknowledgement of several features unique to fintech as an industry and a need for reciprocal flexibility in regulation. By allowing industry participants to be supervised through SROs, the approach aimed to balance innovation and scalable growth with financial stability and consumer protection. Internationally, to capitalise on growing economies, their regulators have tried to obtain input from relevant stakeholders (including non-regulated entities) while evolving proportional regulations.
Key Elements of the SRO Framework
The framework requires that SROs be set up as not-for-profit companies under Section 8 of the Companies Act, 2013. This is intended to ensure independence and prevent any conflict of interest. However, stipulating a minimum net worth of INR 2 crore may pose difficulties for smaller industry players seeking to become SROs.
It is admirable that the membership is comprehensive and includes both regulated and unregulated fintech. However, with certain entities choosing not to participate in the self-regulatory mechanism, the framework's emphasis on voluntary membership could, nevertheless, cause fragmentation. This might make the SRO less successful in establishing standards for the whole sector.
The governance structure seeks to balance different viewpoints by mandating one-third of independent directors and a majority of non-independent directors from unregulated fintechs. In particular, when it comes to standard-setting and enforcement actions, this composition could result in conflicts between the interests of regulated and unregulated entities.
Opportunities and Challenges
The SRO framework encourages shared responsibility among fintech participants by offering a forum for industry cooperation and group problem-solving. There are important issues to resolve even if its goal is to improve market integrity and consumer protection through industry-led standards. The preservation of SROs' genuine self-regulatory nature is a major concern. In order to prevent SROs from becoming quasi-regulators that allow the RBI to indirectly control unregulated firms, the framework makes it clear that SRO codes should not be used in place of direct regulatory frameworks. This would go against the goal of the framework, which is to promote self-governance. SROs must carefully strike a balance between establishing the norms that are required and maintaining room for technological disruption, even as the framework aims to encourage ethical innovation.
The Path Forward
Preventing possible abuse and preserving actual independence are essential to the RBI's framework's performance. By limiting shares and requiring non-discriminatory membership fees, the framework addresses the worry that dominant players may not use the SRO structure to create obstacles to entrance or engage in anti-competitive behaviour. The SRO should help industry-regulators communicate, but it must remain independent and not operate as a stand-in regulatory channel.
The framework's focus on freedom and voluntary participation offers a starting point, but constant attention to detail is essential. The SRO governance structure's ability to serve as a model for cooperative regulation in the Indian financial sector would depend on its regular evaluation and improved data protection measures.
Footnotes
1 Framework for Self-Regulatory Organisation(s) in the FinTech Sector, Reserve Bank of India, available at: https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1263.
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