Navigating Responsibility: RBI's SRO-FT Framework and the Future of FinTech

The Indian FinTech market is expected to reach a valuation of USD 1 trillion and generate revenue up to USD 2 billion by 2030[1]. While innovation is crucial for growth, it also brings risks such as cybersecurity threats, data privacy concerns, internal governance, and potential consumer harm.

The Reserve Bank of India (RBI) introduced a finalized Framework for Self-Regulatory Organizations (SROs) in the FinTech sector on May 30, 2024[2] (“SRO-FT Framework”) to foster responsible innovation and enhance consumer protection amidst the swiftly evolving landscape of financial technology. The RBI in the SRO-FT Framework has defined ‘FinTechs’ to mean “entities that provide technological solutions for delivery of financial products and services to businesses and consumers or encompass regulatory and supervisory compliance in partnership with traditional financial institutions or otherwise.”

Need for SRO-FT in the FinTech Sector. SROs are industry driven bodies created to connect regulatory standards with industry-specific requirements. The SRO-FT Framework enforces regulatory standards, promotes transparency, and encourages cooperation among FinTech entities, even in the absence of a formal regulation.

Key Highlights:

a. Eligibility and Requirements. SROs are required to register as a ‘not-for-profit company’ under the Companies Act, 2013. The shareholding of the SRO should be well-diversified, with no single entity or group of entities acting together and holding 10% or more of its paid-up share capital. SROs must maintain a net worth of INR 20 million, and approval from the RBI is necessary to establish overseas entities or offices.

b. Independence from Influence. SROs are required to operate independently, free from influence of any single member or group of members to ensure not just refined decision-making and but to also prevent the organisation from being swayed by a dominant few. The SROs must avoid conflict of interest, and ensure unbiased oversight over its members to gain the confidence of industry participants and the regulator.

c. Recognition. Upon recognition, SROs are mandated to adhere to the SRO-FT Framework. However, the recognition is subject to revocation if SRO operations are prejudicial to public interest. SROs should stand for inclusivity, such that, FinTech companies of all sizes, stages, and activities may participate. Membership must be voluntary and open to both domestic and international firms with reasonable and non-discriminatory fees.

d. Governance and Management. At least one-third of members in the Board, including the chairperson of each SRO, should be independent, and without any active association with a FinTech entity to ensure balanced decision-making.

e. Roles and Responsibilities. SROs must serve as a liaison between the financial regulator and the FinTech sector by representing the collective viewpoint of members and addressing broader issues with RBI.

f. Grievance Redressal and Dispute Resolution. SROs must establish an efficient, fair and transparent dispute resolution and grievance redressal framework for its members.

g. Oversight and Enforcement. SROs must deploy suitable surveillance mechanisms for effective monitoring of the FinTech sector. SROs must enforce strict confidentiality of surveillance data and limit data collection to essential information needed for the specified purposes disclosed to the FinTechs.

h. Reporting Requirements. SROs should collect relevant and up to date sectoral information and share it with the RBI to aid in policy making. For this purpose, SROs should, where required, co-ordinate the introduction of new products within the regulatory framework set by the RBI.

Observation. The SRO-FT Framework represents a proactive approach by RBI to manage the risks and opportunities with the rapid digitization of financial services in India. FinTech entities can be expected to be incentivised to be a part of an SRO for enhanced credibility in the industry, networking opportunities, influence in regulatory policy making and risk mitigation, which will also provide RBI with real-time visibility into the industry dynamics.

Way Forward. The implementation of the SRO-FT Framework will stand as a crucial move for the FinTech industry. The key points to be taken into consideration in the process of implementation are:

a. The framework for recognising an SRO should incorporate a requirement for conducting thorough due diligence on its members.

b. It would be a productive move for RBI to recognise the relevant SROs per sector/vertical. While multiple SROs within a sector can encourage healthy competition, it might make it difficult to coordinate and represent the industry interests effectively to regulatory bodies.

c. It is also to be seen how FinTech’s would manage cooperation when there is a conflict of interest among them.

d. The SROs experience will be of utmost importance in offering support to early- stage entities to keep up with the constant evolving regulatory landscape, and to create policies in the future.

Conclusion. In conclusion, the SRO-FT Framework marks a significant step towards a more collaborative, and effective regulatory landscape, aligning with the evolving needs of the FinTech sector. While the draft framework is comprehensive, it still needs some clarifications and additional considerations on aspects such as recognition of, cooperation among FinTechs and specialized support to early-stage entities to ensure effective implementation of the SRO-FT Framework.

References:

1. FinTech report, https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/financial-services/2022/ey-one-trillion-dollars-india-fintech-opportunity-chiratae-ventures-ey-fintech-report_v1.pdf

2. SRO-FT Framework,  Reserve Bank of India - Reports (rbi.org.in)