INTRODUCTION
In recent years, the financial technology ("FinTech") sector has undergone remarkable expansion, reshaping the landscape of financial transactions, investment management and banking services access. Innovations such as mobile payment applications and robo-advisors have significantly transformed the financial industry, providing consumers globally with enhanced convenience, efficiency and accessibility. Nevertheless, the swift evolution inFinTech sector raises pertinent issues regarding regulatory supervision, safeguarding consumer interests and addressing potential systemic risks.
Acknowledging the significant changes in the FinTech sector, the Reserve Bank of India ("RBI"), on January 15, 2024, published Draft Framework for Self-Regulatory Organisation(s) in the FinTech Sector ("Draft"), with the aim to address various related issues includingbut not limited to consumer protection, grievance resolution, internal management, data & cyber security and to foster a harmonious equilibrium between encouraging innovation while ensuring compliance to regulatory standards.The Draft has further emphasized that the Self-Regulatory Organisation(s) in the FinTech Sector ("SRO-FT") must genuinely reflect the diversity of the FinTech sector, promoting inclusivity and leveraging the combined expertise of its members to establish standards.
ELIGIBILITY AND APPLICATION REQUIREMENTS OF SRO-FT
- Non-profit status: The requirement for the SRO-FT to be established as a non-profit organization under Section 8 of the Companies Act, 2013, underscores the importance of its mission being driven by regulatory objectives and serving the interests of the FinTech industry & its stakeholders, rather than pursuing rather than pursuing financial gains.
- Clarity of objectives: The explicit declaration of the SRO-FT operation as a primary objective in the Memorandum of Association (MoA) is essential for transparency and accountability.
- Financial soundness: SRO-FT must demonstrate sufficient net worth and infrastructure capabilities for its operational effectiveness. Financial stability enables the organization to invest in necessary IT infrastructure and deploy technological solutions within a responsible time frame,indicating the organization's capacity to sustain its activities over the long term, contributing to its credibility and reliability.
- Risk management: Implementation of a system to address occurrences of 'user harm' by SRO-FT, whether identified through internal monitoring or brought to its attention by RBI or other relevant stakeholders, ensuring that such related issues are addressed promptly and effectively.
- Regulatory compliance: The requirement for prior approval from the RBI before establishing overseas entities or offices is essential for regulatory oversight.
- Applications requirements: Applications for recognition as an SRO-FT necessitate submission of the Memorandum of Association (MoA) along with a comprehensive plan outlining objectives accomplishmentstrategies. The determination of the requisite number of SRO-FTs for a particular sub-sector rests with the RBI's discretion. Final approval of applications is subject to the RBI's decision, upon which issuance of a Letter of Recognition(LoR) follows, contingent upon adherence to specified conditions, including provision of accurate information and compliance with the established framework, terms and conditions.However, RBI retains the authority to revoke recognition of an SRO-FT if it perceives the organization's operations to be contrary to public interest or detrimental to any stakeholders. Such revocation may occur if the SRO-FT is found to engage in activities not aligned with its stated objectives or if its functioning deviates from regulatory standards and expectations.
ELIGIBILITY CRITERIA FOR BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL OF SRO-FT
- Professional competence and integrity: The Board of Directors (BoD) and Key Managerial Personnel (KMP) of the applicant company must demonstrate professional competence and shall maintain a reputation for fairness and integrity.
- Disclosure of legal proceedings: During the application process, any ongoing legal proceedings against the applicant company, BoD or KMP must be disclosed determining that such proceedings shall not impede the functioning of the SRO-FT or damage its reputation. Additionally, individuals associated with the applicantcompany, BoD or KMP shall not have any history of convictions, particularly related to moral turpitude or economic offenses.
- Finality of RBI’s opinion: The RBI’s assessment of fit and proper status of the applicant company, BoD, and KMP shall be considered conclusive.
- Prescribed conditions for public interest: Following the recognition of an applicant company as an SRO-FT, the RBI retains the authority to impose additional conditions when deemed necessary. These conditions are designed to safeguard against actions that could potentially harm public interest.
MEMBERSHIP CRITERIA OF SRO-FT
- Comprehensivemembership representation: SRO-FT prioritizes diverse membership, encompassing entities of all sizes and operational stages within the FinTech industry.
- Voluntary membership principle: Membership in SRO-FT is voluntary, fostering collaboration and participation among FinTech firms. RBI actively encourages FinTech entities to join, enhancing the SRO-FT 's effectiveness.
- Domicile requirement: SRO-FT must be registered in India, but membership to SRO-FT is open to FinTech firms globally. This approach promotes international collaboration and knowledge exchange.
- Fair membershipfee structure: SRO-FT ensures a fair fee structure, promoting accessibility for all members regardless of size or financial capacity encouraging broad participation.
- Authority through membership agreements: Membership agreements grants SRO-FT the authority to set regulatory frameworks, ensuring accountability and compliance among members.
FUNCTIONS AND RESPONSIBILITIES OF SRO-FT
- Standardsetting: SRO-FT is dedicated to implementing a consultative approach to formulate rules and standards, ensuring broad input and consensus from its members. From meticulously crafting customized codes of conduct tailored to the diverse operations within the sector and defining industry benchmarks & technology standards, fostering transparency & compliance across the board, SRO-FT shall diligently develop standardized documents in adherence to statutory & regulatory requirements, promoting consistency and legal conformity. Guided by a commitment to responsible practices, SRO-FTshall formulate guidelines for advertisements and market behaviour, rigorously enforcing consequences for any misconduct detected.
- Oversight and enforcement: SRO-FT establishes structured frameworks for overseeing and enforcing regulations, ensuring systematic compliance within the sector. By deploying surveillance measures, it actively monitors the industry landscape, promptly detecting irregularities and ensuring adherence to regulatory standards. Additionally, the SRO provides guidance on detrimental practices that could impede sectoral growth.
- Developmental initiatives: SRO-FT actively promotes awareness of regulatory requirements and cultivates a culture of compliance among its members. Through diverse channels, it disseminates sector-specific information, enhancing members awareness and understanding of industry dynamics. Moreover, SRO-FT encourages research and development initiatives through studies, surveys and collaborative discussions, fostering innovation within the sector. Additionally, it provides guidance and support to smaller entities, sharing best practices publicly to promote growth and professionalism across the FinTech landscape.
- Grievance redressal and dispute resolution: SRO-FT shall be committed to establish transparent and efficient frameworks for addressing member grievances and resolving disputes, ensuring fair and timely resolution processes. Additionally, it prioritizes consumer education initiatives aimed at enhancing consumer awareness regarding industry products and services.
RESPONSIBILITIES OF SRO-FTREGARDING RBI’S REGULATORY COMPLIANCE
SRO-FT plays a crucial role in its engagement with RBI, serving as the unified representative voice of its members and advocating for fair treatment within the FinTech sector. It promptly reports any violations of statutory or regulatory obligations by its members, ensuring compliance and accountability. Additionally, SRO-FT gathers and shares sector-specific data with RBI to support policymaking efforts and collaborates on the development of taxonomy standards for FinTech entities. Furthermore, it executes tasks assigned by RBI, submits required reports and information and participates in regular interactions, providing comprehensive insights and suggestions. SRO-FT also facilitates inspections or audits by RBI and adheres to directives specified by regulatory authorities, while also offering guidance and support to facilitate effective regulation of FinTech entities.
DA LAW REMARKS
The introduction of the draft framework by RBI for SRO-FTindicates a significant leap forward in strengthening regulatory structures. This initiative not only serves to safeguard consumer interests but also cultivates an environment conducive to innovation and advancement within the dynamic FinTech landscape. By emphasizing collaboration between various stakeholders, including industry participants and regulatory bodies, the framework aims to ensure the continued success and growth of FinTech in India. It underscores the importance of proactive engagement and mutual cooperation in shaping regulatory policies that strike a delicate balance between fostering innovation and upholding regulatory standards. Through this collaborative approach, the draft framework seeks to instil confidence among consumers while fostering an atmosphere that encourages entrepreneurship, technological advancement and responsible business practices within the FinTech sector.
