Fintechs seek 'safe harbour' provision as regulatory waters turn choppy

The fintech and payments industry is preparing a proposal for RBI seeking safe harbour provisions to protect compliant licensed entities from liabilities and retrospective regulatory action

Weeks after the arrest and subsequent bail of Fino Payments Bank chief Rishi Gupta, the fintech and payments industry is preparing a working paper proposing the introduction of a ‘safe harbour’ framework for the sector, according to people familiar with the matter.

 

The Payments Council of India (PCI) has engaged independent consultants to draft a framework for introducing safe harbour provisions which is likely to be submitted to banking regulator Reserve Bank of India (RBI).

 

Singapore is among the jurisdictions being studied for introducing legal safeguards for the sector, a person familiar with the matter said, declining to be named given the sensitivity of the issue.

 

A safe harbour provision would shield entities from liabilities or penalties, including retrospective ones, provided they comply with clearly defined regulatory and compliance requirements.

 

“There has to be a safe harbour for licensed entities which have followed all the norms prescribed by the Reserve Bank of India (RBI),” said Vishwas Patel, director, Self-Regulated PSO Association (SRPA), a self-regulatory body for the payment system operator (PSO) sector.

 

The push for a safe harbour provision comes at a time when companies are seeking greater operational certainty within the ecosystem amid concerns over the risk of retrospective regulatory or tax action especially in a multi-layered ecosystem.

 

“The Payments Council of India (PCI) is working on a paper on how a safe harbour can be created for such licensed players from regulatory action at a time when they have followed all laid down processes,” Patel told Business Standard.

 

The discussion gains importance at a time when the digital payments ecosystem continues to grow and regulations for the sector take shape.

 

The move follows the arrest of Fino Payments Bank chief executive Rishi Gupta in February over alleged goods and services tax (GST) evasion linked to the real money gaming (RMG) sector merchants.

 

The bank has maintained that it followed ‘adequate due diligence and KYC norms’ at the time of onboarding programme managers or merchants, adding that it did not bypass any due diligence processes for the merchants or programme managers in question.

 

“Currently, the trend is that if the end merchant facing the liability cannot be traced, the liability is presumed to rest with the company, which is then required to ensure the relevant taxes are paid,” a person said.

 

In Fino’s case, the arrest of its chief relates to alleged GST evasion by three programme managers.

 

These are intermediaries that source and refer merchants for payment processing to companies.

 

While programme managers source and bring business to organisations, the arrest of the bank’s chief had prompted the industry to question the accountability of merchants’ businesses despite prescribed due diligence, Business Standard reported in March.

 

The person quoted above added that licensed entities in the payments industry are already regulated and have followed due process for a regulatory nod.

 

“There should not be overarching measures in levying major liabilities on licensed entities,” the person explained. There has to be some safe harbour, given either by RBI or the Home Ministry, when all rules are followed,” the person added.