By Rupin Chopra and Apalka Bareja
With its rapid technological advancement, FinTechs are creating a facilitating impact on the financial services industry in India. FinTechs are essential to the transformation of financial services because they reduce costs, improve accessibility, and save time. The FinTech sector in India is rapidly evolving, introducing new financial services and technologies. Over the last decade, the FinTech wave has transformed the accessibility and reach of financial services in India. The Indian FinTech market is predicted to grow to USD 1 Trillion and generate up to USD 2 Billion in revenue by 2030.[1] While innovation is crucial for growth, it also brings risks such as cybersecurity threats, data privacy concerns, and potential consumer harm.
Reflecting this momentum, The Reserve Bank of India (RBI) released finalized Framework for Self-Regulatory Organizations (SROs) in the FinTech sector on May 30, 2024[2] primarily to promote responsible innovation and ensure consumer protection within the rapidly evolving landscape of financial technology.
Need for Self-Regulatory Organization(s) in the FinTech Sector
Achieving delicate balance within the FinTech sector could be possible through self-regulation. FinTech should proactively develop and abide by industry standards and best practices by shifting towards a culture of self-governance. With this strategy, the industry will be able to show that it is dedicated to innovation and ethical behavior even in the absence of official regulation. By working together, the industry may identify and resolve problems as a whole, create an atmosphere that encourages innovation, and lead the way in ethical business practices. Self-regulation could also lead to the benefit of adaptability to quickly changing market conditions and technological improvements.
Key Highlights of the Framework
As per the new Framework, the SRO-FT should have the following features:
(i) Accurate Reflection of the FinTech Industry:
The SRO-FT ought to be strengthened by its membership, guaranteeing that it accurately reflects the FinTech industry. This encompasses FinTech that are presently subject to RBI regulation (like NBFC-Account Aggregators and NBFC-Peer to Peer Lending Platforms), while keeping banks out.
(ii) Development-focused:
- The SRO-FT should be development-focused, actively advancing the expansion and advancement of the sector. This entails establishing minimal requirements for membership, giving advice, supplying specialized knowledge and experience, and assisting in the development of capacity by means of training initiatives. Through the promotion of ongoing education and skill enhancement, the SRO-FT ought to strengthen and grow the FinTech ecosystem.
- Furthermore, the SRO-FT’s experience should be crucial in closing the skills gap, offering early-stage entities the support and direction they need to keep up with the constantly changing regulatory landscape and financial technology, and in helping to create policies that look forward.
(iii) Independence from Influence:
- The SRO-FT should function independently, unaffected by the influence of any one member or group of members, in order to preserve its credibility. This would guarantee well-considered decision-making and shield the company from the influence of few dominant entities.
- In addition to avoiding conflicts of interest, the SRO-FT shall provide impartial control over its members. Gaining the trust and confidence of industry players and regulators alike would require the SRO-FT to be independent in order to strengthen its reputation as an impartial and trustworthy organization.
(iv) Encouraging Members to Adhere to Regulatory Expectations:
- The SRO-FT must have the ability to inspire its members to prioritize compliance with regulations. This should entail encouraging a culture of compliance, pushing for required adjustments, and serving as a communication channel between RBI and industry participants.
- The explicit regulatory framework for FinTech, if any, shall not be replaced by the norms, standards, or regulations that its members enact. In order to fulfill its responsibility for guaranteeing compliance, the SRO-FT must have sufficient authority to look into and discipline its members for breaking codes, standards, or other regulations.
(v) Legitimate Arbiter of Disputes:
Participants ought to view the SRO-FT as an authorized conflict resolution body. This would necessitate the establishment of an open and equitable dispute resolution process among members that fosters trust in the FinTech industry. Through effective resolution of member issues and disputes, the SRO-FT is expected to enhance the stability and harmony of the FinTech ecosystem.
(vi) Information Repository:
The SRO-FT should gather, examine, and distribute pertinent information about the actions of its members in its capacity as an information repository.
This information center ought to be an invaluable tool for trend analysis, industry research, and policy creation. The SRO-FT shall strengthen and fortify the FinTech industry overall by pooling and disseminating knowledge. It is recommended that the SRO-FT establish a repository with all of this data pertaining to the FinTech companies that it represents.
The Framework further lists the below-mentioned requirements to be adhered by the SROs in the FinTech Sectors:
Eligibility and Requirements
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Roles and Responsibilities |
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Monitoring and Compliance | SRO-FT are required to put in place strong surveillance systems to keep an eye on the FinTech industry and make sure that regulations are being followed.
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Data Protection and Confidentiality | The RBI requires SRO-FTs to keep surveillance data strictly confidential.
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Reporting and Policy Support | SRO-FT must report infractions, keep RBI updated on FinTech, share sectoral data for policy-making.
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Conclusion
The RBI SRO-FT Framework is a significant step forward in India’s FinTech regulation, demonstrating a commitment to adaptation in a dynamic market. They represent a proactive approach by the central bank to manage the risks and opportunities associated with the rapid digitization of financial services in India. The adoption of this framework sets a clear strategy, to build on the strengths of India’s FinTech sector to develop a balanced, transparent and robust regulatory framework. This strategy, which focuses on continuous improvement and open communication, is intended to ensure both immediate and long term success for FinTech ecosystem.
Aishwarya Rajput, Junior Associate Advocate at S.S. Rana & Co. has assisted in the research of this article.
[1] Available at https://www.3one4capital.com/blogs/signals-treading-regulatory-waters-rbis-FinTech-sro-framework
[2] Available at https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/SRO30052024F5B5DF1DE3C8145A8AC7AD7F14C5F604C.PDF
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