Self-regulation the key to fintech growth

The fintech sector, a cornerstone of India’s digital financial revolution, is renowned for rapid innovation and growth. To keep pace, the Reserve Bank of India (RBI) unveiled a comprehensive framework for self-regulatory organisations (SRO) in May 2024. This will allow the industry to set and uphold its own standards while ensuring accountability and a culture of responsible innovation.

The RBI’s regulatory approach to fintech has usually been top-down, with entities such as banks and investment firms accountable for outsourced fintech activities. While this offered strict control, it stifled the agility that fintech startups are known for. Existing SROs such as the Indian Banks’ Association and the Association of Mutual Funds of India offer something of a pattern, but lack the comprehensive reach needed for this rapidly growing sector.

The framework changes the game. It envisages SROs as inclusive, representative bodies fostering industry-wide standards and ethical practices. By promoting collaboration and knowledge sharing, the RBI aims to harness the collective expertise of fintech players to drive growth and innovation.

To be fair and representative, SROs must register as not-for-profit companies with a diversified shareholding, in which no entity holds more than 10% of the capital. They must maintain a minimum net worth of INR20 million (USD240,000), have robust IT mechanisms for effective oversight and address consumer grievances promptly. Setting up overseas entities or offices needs RBI approval.

Inclusivity is key. SROs have to represent fintech companies of all sizes, stages and activities. Voluntary membership must be open to domestic and international firms. Membership fees should be reasonable and non-discriminatory. To ensure effective governance, SRO boards must adhere to fit and proper criteria, including professional competence, integrity and clear legal records. Boards should include independent members and representation from unregulated entities to ensure balanced decision-making.

Applications for SRO recognition are to be rigorous, requiring comprehensive documentation, including a detailed membership roadmap. The RBI can return or reject incomplete applications. Once recognised, SROs must adhere to the framework’s guidelines, with the RBI able to revoke recognition if an SRO is deemed detrimental to the public interest.

A core function of SROs is providing a fair and transparent mechanism for resolving disputes between members. This includes establishing efficient grievance redress processes and fostering trust and co-operation within the industry.

SROs must establish and enforce industry-wide rules and standards through consultation. This includes developing codes of conduct, setting benchmarks, and promoting responsible advertising. They will monitor members’ activities through surveillance mechanisms, with the ability to enforce compliance through such measures as counselling, reprimands and expulsion. SROs will be a bridge between the industry and the RBI, facilitating communication and promoting a culture of compliance. They will collect and analyse data related to members’ activities, resulting in research, trend analysis and policy-making.

By focusing on these key pillars, the RBI’s framework aims to empower the fintech industry to self-regulate effectively, ensuring responsible growth, innovation and consumer protection.

The success of self-regulation in India’s over-the-top media sector sets a good precedent. The Internet and Mobile Association of India’s code of ethics and robust grievance redress mechanism have significantly reduced disputes and built trust between content creators and audiences. This collaborative model shows how self-regulation, implemented effectively, empowers industries while ensuring accountability.

Fintech investment has dropped since 2022. The framework is a significant step towards more collaboration and dynamic regulation. By giving the industry greater input and responsibility for shaping its own future, the RBI is encouraging innovation to thrive alongside consumer protection and financial stability.

As the sector matures, SROs will be increasingly necessary. With proper leadership and commitment, they can transform fintech operations, ensuring that the industry’s significant potential is realised responsibly and sustainably.

The author of this article is Aasish Somasi, Associate Partner at SNG & Partners.

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