RBI Finalises Framework for Self-Regulatory Body in Fintech Sector

In May 2024, the Reserve Bank of India (RBI) finalised a framework for recognising Self-regulatory Organisations (SROs) in the fintech sector. An SRO, or Self-regulatory Organisation, is a body that establishes and enforces industry standards and regulations. Composed of industry members, it ensures integrity and ethical behaviour by regulating its peers.

This development follows feedback from stakeholders on a draft released by the RBI on 24th January. The finalised framework aims to establish SROs within the fintech sector to set and regulate legal standards, ensuring a responsible and organised fintech ecosystem within India’s borders.

The newly approved SROs will be led by industry players and will bear the responsibility for setting and enforcing regulatory standards, promoting ethical behaviour, ensuring market integrity, resolving disputes, and promoting transparency and accountability among members. This initiative seeks to address the unique challenges facing the fintech sector while fostering innovation and expansion.

In September, RBI Governor Shaktikanta Das emphasised the importance of this initiative, calling for a self-regulatory body to address the peculiar challenges facing the fintech sector. An initial draft was presented in January, followed by public consultations to refine the framework.

Key Elements of the Framework

The rules mandate that SROs use a representative structure by leveraging accumulated knowledge and experiences. The overarching goal is to implement guidelines that are universal across all fintech areas and can be easily enforced. This approach ensures that SROs can effectively respond to diverse demands, meeting the needs of various fintech organisations.

Additionally, the RBI has directed SROs to encourage their members to align with regulatory priorities and maintain open communication with the central bank. This collaborative effort aims to achieve regulatory objectives while promoting innovation and growth within the fintech field. By establishing a communication channel between regulatory components and affected agents, SROs can help ensure that regulations keep pace with technological changes and market demands.

Ownership and Membership

To prevent any single entity from exerting undue influence, no person or entity is allowed to hold more than 10% of an SRO’s fully paid capital. The guidelines also permit the inclusion of fintech companies from other jurisdictions into the Indian system, enhancing international collaboration and harmonisation. This approach is expected to better position Indian fintech enterprises to compete globally by adopting leading practices from around the world.

Industry Growth and Challenges

With the fintech industry in India experiencing significant growth due to increasing demand for digital payments and loans, there is a clear need for robust regulations. The rapid expansion of this sector has raised concerns regarding consumer protection, data privacy, and other issues, which the SRO framework aims to address. Given the growing reliance on fintech solutions by individuals and businesses, strong regulatory oversight has become essential.

The new framework addresses these issues by adopting a self-regulatory approach that is both manageable and adaptable. By allowing the sector to police itself, the RBI hopes to promote a flexible and efficient regulatory regime capable of keeping up with the fast-paced changes in the fintech industry.

Financial and Operational Requirements

SROs must meet specific financial requirements to be recognised by SEBI, ensuring they are well-equipped for performance and oversight. The fintech sector should be comprehensively represented by the SRO, encompassing entities of various sizes, stages of development, and activities. Additionally, leading managers and directors of SROs should uphold professionalism and fairness.

“This comprehensive representation is crucial for the legitimacy and effectiveness of the SRO. By encompassing all types of fintech entities, the SRO can ensure its standards and rules address the needs and perspectives of diverse industry representatives.”

Implementation and Future Outlook

The RBI will evaluate applications to determine how many SROs to recognise, with a focus on high standards in fintech. This selective process underscores the RBI’s commitment to ensuring that only competent and genuine firms are appointed as regulators.

The framework is anticipated to play a pivotal role in shaping the future of India’s fintech sector, balancing innovation with regulatory compliance. The RBI aims to implement this framework soon, enabling self-regulatory organisations to start operating and helping to steer the evolving regulatory landscape.

This framework could serve as a model for other sectors, demonstrating that enforced self-regulation can promote business advancement and originality while safeguarding public interest.