Reserve Bank unveils comprehensive framework for Self-Regulatory Organisations in fintech sector

The Reserve Bank of India (RBI) on May 30 released framework for Self-Regulatory Organisations (SROs) for fintech sector. According to the guidelines SROs should be development-oriented, true representative and legitimate arbiter of disputes. 

SROs for fintech sector should also be independent from influence, encouraging members to subscribe to regulatory expectations, and repository of information, it added. The oversight framework should be activity-based, risk-based, scale-based and phased-in as well, RBI said. 

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The self-regulatory organisations (SRO) would be industry-led and will be responsible for establishing and enforcing regulatory standards, promoting ethical conduct, ensuring market integrity, resolving disputes, and fostering transparency and accountability among its members. 

RBI has asked the SROs to be one built on a ‘representative’ structure, which would enable it to draw upon the collective expertise and experience of its members, resulting in development of standards that are pragmatic, adaptive, and widely accepted within the fintech community. 

SROs have been asked to motivate its members to align with regulatory priorities and facilitate communication with the regulator, i.e., Reserve Bank. 

The shareholding of the SRO should be sufficiently diversified, and no entity should hold 10 percent or more of its paid-up share capital, either singly or acting in concert. The SRO could have fintechs domiciled outside India as its member, the central bank said. 

The SRO-FT should put in place systems for managing ‘user harm’ instances that come to its notice or are referred to it by the RBI or any other stakeholder. The user harm instances may include fraud, misselling, unfair practices, unauthorised transactions, or any other form of misconduct that harm consumers of financial services. 

The SRO-FT should not set up entities/offices overseas without the prior approval of the RBI. 

Membership in the SRO-FT should be primarily from fintechs that are currently not regulated by any financial sector regulator. Membership may also be open to regulated entities (other than banks). 

The number of SRO-FTs to be recognised would be considered based on the number and nature of applications received. 

Oversight and enforcement 

• The fintechs should be encouraged to report its various activities to the SRO-FT. 
• The SRO-FT should have a structured framework to guide its oversight and enforcement functions. The baseline surveillance standards and oversight framework should meet the regulatory expectations. 
• It should deploy suitable surveillance mechanisms for effective monitoring of the fintech sector to detect and highlight exceptions. This should involve the use of tools and techniques to assess the activities of industry participants.
• However, the SRO-FT should ensure stringent confidentiality of surveillance data and restrict data collection to essential information disclosed to the fintechs for the specified purposes. 
• It should establish clear standards of conduct and specify consequences for violation of agreed rules/codes such as counselling, cautioning, reprimanding and expelling members. It may be noted that such consequences if entails monetary penalty, they should be ensured that they are reasonable and not prohibitive. 
• The SRO-FT would be empowered to bar/remove any of the fintech entities to be its member for a period as specified by it, or for eternity if the circumstances so require. 

The central bank had released a ‘Draft framework for recognising Self-Regulatory Organisations (SRO) for FinTech Sector’ on January 15, 2024, inviting comments and feedback from the stakeholders.