Regulating fintech

RBI draft guidelines kick off the process

The Reserve Bank of India’s (RBI’s) draft norms for self-regulatory organisations for the financial technology sector (SRO-FT) broadly define the ideal qualities these bodies should possess, but they leave some room for flexibility within the contours. The draft framework notes, to maintain credibility, an SRO-FT should operate independently — remain free from the influence of a single member or a group of members, avoid conflicts of interest, and ensure unbiased oversight of its members. Independence would enhance an SRO-FT’s reputation as a neutral and reliable entity, which is essential for gaining the trust of industry participants and regulators. It is important that these entities have a robust information technology infrastructure and the ability to deploy technological solutions “within a reasonable timeframe”. They should also have sufficient net worth and a demonstrated capability to establish the necessary infrastructure.

An SRO-FT should be capable of motivating its members to align with regulatory priorities and promote a culture of compliance. It should also be empowered to investigate and take disciplinary action against members for non-adherence to codes, standards, and rules. This would help it shape a regulatory environment conducive to innovation while ensuring consumer protection. Though membership of an SRO-FT would be voluntary, financial technology companies (fintechs) would be encouraged to become members. The draft norms have left it to the sector to decide whether there should be one or multiple SROs for fintechs, but they seem to nudge stakeholders in the direction of the latter. The draft notes, given the diverse nature of fintechs, not restricting the number to one might dilute some industry concerns. On the other hand, having multiple SRO-FTs could undermine the representative character of self-regulation. Fintechs will have to find a consensus on this subject. Assuming that multiple SROs are set up, the guidelines leave room for different SRO-FTs to achieve the goals in different ways.

The draft also lays down guidelines on structure. The SRO should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. The applicant should represent the fintech sector with membership of entities across sizes, stages, and activities. If representation is inadequate at the time of application, a road map for achieving this within a reasonable timeline should also be given. The RBI clearly outlines its veto powers on the fit-and-proper status of the applicant company, the board of directors, and key managerial persons. It could also nominate observers on the board and inspect the books of the SRO-FT, or arrange to have the books audited. The expenses of such an inspection or audit would be borne by the SRO-FT in question. Most fintechs are not directly regulated at present.

This fast-growing industry has been a prime mover when it comes to enabling financial inclusion. However, there is a need to find ways to create incentives for SRO membership. The sector must adopt the best governance and operational practices. SROs would be expected to monitor the sector and guide growth in the right direction. This draft does well in setting up broad guidelines for the tasks they must fulfil, without imposing a straitjacket on processes.