The fintech sector, a cornerstone of India’s digital financial revolution, is celebrated for its rapid innovation and growth. To keep pace with this dynamic industry, the Reserve Bank of India (RBI) introduced a comprehensive framework for self-regulatory organisations (SROs) in May 2024.
This initiative allows the industry to set and uphold its own standards, ensuring accountability and fostering a culture of responsible innovation.
Traditionally, the RBI’s regulatory approach to fintech has been top-down, with banks and investment firms held accountable for outsourced fintech activities. While this offered strict control, it stifled the agility that fintech startups are known for. Existing SROs like the Indian Banks’ Association and the Association of Mutual Funds of India offer a model but lack the comprehensive reach needed for this rapidly growing sector.
The new framework changes the game. It envisions SROs as inclusive, representative bodies that foster industry-wide standards and ethical practices. By promoting collaboration and knowledge sharing, the RBI aims to harness the collective expertise of fintech players to drive growth and innovation.
To be fair and representative, SROs must register as not-for-profit companies with diversified shareholding, where no entity holds more than 10% of the capital. They must maintain a minimum net worth of INR 20 million (USD 240,000) and have robust IT mechanisms for effective oversight and prompt consumer grievance resolution. Establishing overseas entities or offices requires RBI approval.
Inclusivity is crucial. SROs must represent fintech companies of all sizes, stages, and activities. Membership should be open to domestic and international firms, and fees should be reasonable and non-discriminatory. To ensure effective governance, SRO boards must meet criteria for professional competence, integrity, and clear legal records. Boards should include independent members and representation from unregulated entities to ensure balanced decision-making.
Applications for SRO recognition will be rigorous, requiring comprehensive documentation, including a detailed membership roadmap. The RBI can return or reject incomplete applications. Once recognised, SROs must adhere to the framework’s guidelines, with the RBI having the power to revoke recognition if an SRO is deemed detrimental to the public interest.
A core function of SROs is to provide a fair and transparent mechanism for resolving disputes between members. This includes establishing efficient grievance redress processes and fostering trust and cooperation within the industry.
SROs must establish and enforce industry-wide rules and standards through consultation. This includes developing codes of conduct, setting benchmarks, and promoting responsible advertising. They will monitor members’ activities through surveillance mechanisms, with the ability to enforce compliance through measures such as counselling, reprimands, and expulsion. SROs will serve as a bridge between the industry and the RBI, facilitating communication and promoting a culture of compliance. They will collect and analyse data related to members’ activities, resulting in research, trend analysis, and policy-making.
By focusing on these key pillars, the RBI’s framework aims to empower the fintech industry to self-regulate effectively, ensuring responsible growth, innovation, and consumer protection.
The success of self-regulation in India’s over-the-top media sector sets a good precedent. The Internet and Mobile Association of India’s code of ethics and robust grievance redress mechanism have significantly reduced disputes and built trust between content creators and audiences. This collaborative model shows how self-regulation, when implemented effectively, empowers industries while ensuring accountability.
Fintech investment has dropped since 2022. The framework is a significant step toward more collaboration and dynamic regulation. By giving the industry greater input and responsibility for shaping its own future, the RBI is encouraging innovation to thrive alongside consumer protection and financial stability.
As the sector matures, SROs will be increasingly necessary. With proper leadership and commitment, they can transform fintech operations, ensuring that the industry’s significant potential is realised responsibly and sustainably.
Source: law.asia
