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The Reserve Bank of India (RBI) is keen to outsource fintech "industry standards and best practices" to self-regulatory organisations, but its new framework is not without its critics.
Last week, the RBI published a new Framework for Recognising Self-Regulatory Organisation(s) in the Fintech Sector.
The rules are final and build on a previous draft version of the framework, which was published in January and followed by a public consultation.
Fintech self-regulatory organisations (SROs) can now apply to become officially recognised using an RBI application form, and will be given formal responsibilities by the regulator.
The framework covers fintech SRO membership and eligibility criteria, conflict of interest controls, dispute resolution, oversight and enforcement, management responsibilities and corporate and governance structures.
All entities meeting or intending to meet the eligibility criteria may apply, and the names of successful applicants will be published and certified as “Recognised SROs” on the RBI website.
Why self-regulation?
When the RBI published its draft framework in January, it acknowledged that fintechs are “significantly reshaping” the landscape of financial services in India by streamlining processes, improving accessibility and reducing costs.
As such, it also said that achieving a healthy balance between facilitating innovation, protecting consumers and meeting regulatory priorities is “crucial” for the sector.
In the preamble to the finalised framework, the RBI provided more information on its reasons for cultivating a “culture of self-governance” and allowing SROs to set industry standards and best practices.
"This approach could empower the sector to demonstrate its commitment to responsible conduct and innovation, even in the absence of formal regulation,” said the RBI.
"Through collaboration, the sector could collectively identify and address challenges, foster an environment where innovation flourishes and guide shared commitment to ethical business practices."
Industry reception
Among industry professionals who spoke with Vixio, opinion is divided as to whether the framework strikes a fair balance of power and whether it will achieve its stated goals.
Mandar Kagade, founder and principal at Black Dot Public Policy Advisors in New Delhi, provided Vixio with a list of “amber” and “red flags” that he has identified within the framework.
For example, in the "Governance and Management" section, the RBI grants itself the power to remove board members of SROs “if felt necessary”. Kagade has flagged this as one of several red flags.
“The language offers no notice of the grounds on which the board member will be removed,” he said. “So, it appears to violate due process.
“Furthermore, the wide latitude the RBI has in removing the member could affect the autonomy of the board member.”
Another red flag can be found in the "Fintech SRO Functions and Responsibilities" section under the "Standard-setting" sub-section, said Kagade.
Here the framework authorises SROs to set up a “mechanism for accreditation” for improving compliance culture, fostering professionalism and creating healthy market behaviour among members.
“The accreditation mechanism should require prior approval of RBI,” the rules note, and must be periodically reviewed by the SRO board.
Kagade sees this rule as an attempt by the RBI to establish “direct regulatory oversight” over fintechs without parliamentary authority.
“The RBI has powers to regulate banks, non-bank financial companies (NBFCs), payment service providers (PSPs) and payment system operators (PSOs) under the Banking Regulation Act, the RBI Act and the Payment and Settlement Systems Act, 2007,” he said.
“It does not have parliamentary authority to regulate fintechs that are none of the above. But the accreditation mechanism requiring approval from the RBI appears to unintentionally extend the RBI’s powers to direct oversight.”
Similarly, in a subsection on "Oversight and Enforcement", SROs are authorised to “surveil” their members.
“The SRO should deploy suitable surveillance mechanisms for effective monitoring of the fintech sector to detect and highlight exceptions,” the framework states.
“This should involve the use of tools and techniques to assess the activities of industry participants, ensuring a proactive approach to maintaining integrity and compliance.”
In Kagade’s view, empowering SROs to surveil their members could impinge on fintech independence.
“These powers risk affecting the integrity and trust between members of the SRO,” he said.
“Members may adopt practices that are unique to their own business model, and they may do so without violating any law or regulation.
“However, merely adopting unique practices should not risk censure or review from an SRO, or invite regulatory attention.”
Balakrishnan Mahadevan, consultant to the World Bank and former COO of the National Payments Corporation of India (NPCI), said that the grounds for self-regulation are clear.
“Despite regulations, we have seen that so many financial institutions with sufficient resources are fined by the RBI for many types of violations,” he said.
Self-regulation could potentially reduce the level of enforcement activity among fintechs, he added, but we will have to “wait and see”.
Going forward, Kagade said he expects that there will be some “back and forth” between the industry and the RBI before prospective SROs begin the process of becoming formally recognised.
