RBI’s Draft Guidelines for Fintech Self-Regulation: A New Era in Financial Technology

The Reserve Bank of India (RBI) has recently released a draft framework for recognising Self-Regulatory Organisations (SRO) for the FinTech sector, inviting comments and feedback from stakeholders and the public by the end of February 2024. The draft framework aims to achieve a healthy balance between facilitating innovation by the industry and meeting regulatory priorities in a manner that protects consumers and contains risk.

What is an SRO for FinTech?

An SRO for FinTech (SRO-FT) is a non-governmental organisation that represents and regulates the interests of its members, who are engaged in providing financial services using technology. The SRO-FT is expected to derive its strength from its membership, ensuring that it is truly representative of the FinTech sector. The SRO-FT should also be development-oriented, actively contributing to the growth and evolution of the industry by providing specialised knowledge, guidance, and capacity building.

What are the functions of an SRO-FT?

The draft framework lays down the following functions for an SRO-FT:

• Setting market standards and codes of conduct for its members, and ensuring their voluntary adoption and compliance.
• Monitoring and enforcing the standards and codes of conduct, and taking disciplinary action against non-adherent members.
• Resolving disputes and grievances among members through a transparent and fair mechanism.
• Facilitating communication and coordination between industry players and regulatory bodies, and advocating for necessary changes.
• Promoting a culture of compliance and consumer protection among members.

What are the governance standards for an SRO-FT?

The draft framework also specifies the governance standards for an SRO-FT, which include:

• Having a clear vision, mission, objectives, and values that are aligned with the regulatory priorities.
• Having a well-defined organisational structure, with adequate representation of different segments of the industry, as well as independent directors.
• Having a competent management team, with relevant qualifications, experience, and skills.
• Having a robust internal control system, with clear policies and procedures for risk management, audit, compliance, etc.
• Having a transparent disclosure mechanism, with regular reporting of activities, performance, finances, etc.

Why is self-regulation preferred for the FinTech sector?

The RBI believes that self-regulation within the FinTech sector is a preferred approach for achieving the desired balance between innovation and regulation. This is because:

• The FinTech sector is dynamic and diverse, requiring flexibility and adaptability to respond to changing market conditions and customer needs.
• The FinTech sector is driven by technology, requiring specialised knowledge and expertise to understand and assess its implications and risks.
• The FinTech sector is collaborative and competitive, requiring trust and cooperation among industry players to foster innovation and growth.

How will the recognition of SROs for FinTech benefit the industry?

The recognition of SROs for FinTech will benefit the industry by:

• Providing a common platform for dialogue and collaboration among industry players, regulators, consumers, and other stakeholders.
• Enhancing the credibility and reputation of the industry by ensuring adherence to high standards of conduct and performance.
• Reducing the regulatory burden on individual entities by delegating some functions to the collective body.
• Encouraging innovation and experimentation by creating a conducive environment for testing new products and services.

The draft framework for recognising SROs for FinTech is a welcome step by the RBI to foster a more mature and responsible FinTech ecosystem in India. It is expected that the final framework will be issued after taking into account stakeholder and public responses, paving the way for a new era in financial technology.