Taxmann's Analysis | Fintech Self-Regulatory Organizations (SROs) and RBI – A Regulatory Symbiosis

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Contents 1.

Introduction

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2.

What is a FinTech SRO?

5

3.

What are the eligibility and membership requirements for Fintech SRO?

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3.1. Fintech SRO should be a Not-for-profit company

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3.2. Fintech SRO should state its operation as an ‘SRO-FT’ as its primary objective

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3.3. Fintech SRO should have sufficient Net-worth requirement

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3.4. SRO-FT should put in place a system for managing ‘user harm’

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3.5. Membership requirements for Fintech-SRO

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What are the eligibility criteria for the Board of Directors and Key Managerial Personnel of fintech-SRO?

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4.1. Professional Competence and Integrity:

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4.2. Legal Proceedings Disclosure

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4.3. Finality of Reserve Bank’s View:

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5.

How to make an application to RBI for registration as an SRO?

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6.

What are the functions and responsibilities of Fintech-SRO?

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7.

What are the responsibilities of the Fintech-SRO towards RBI’s regulatory compliances?

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8.

Governance Excellence: Key Principles and Guidelines for SRO-FT

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8.1. Professional Governance Framework

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8.2. Membership Criteria:

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8.3. Monitoring ‘Fit and Proper’ Status:

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8.4. Independence of Members:

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8.5. Human Resources and Technical Capability:

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8.6. Reserve Bank Oversight:

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Conclusion

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4.

9.

Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

1. Introduction Imagine FinTech as a high-speed financial playground where digital innovation thrives.

To keep it safe and fair, the Reserve Bank of India (RBI) floated a draft framework on January 15, 2024, for Self-Regulatory Organizations (SROs). SRO is the Fintech SelfRegulatory Organization or SRO-FT. The draft framework defines the characteristics, operations, eligibility and Membership of FinTech SRO along with the governance and management framework. In this article, we will explore the important rules and guidelines that would keep the FinTech playground fun, fair, and safe for everyone.

2. What is a FinTech SRO? Fintech Self-Regulatory Organization (SRO-FT) refers to a self-regulatory body proposed for the FinTech sector. Its purpose is to establish industry standards and guidelines, though formal recognition by regulators is optional but desirable for legitimacy.

3. What are the eligibility and membership requirements for Fintech SRO? The eligibility and membership requirements for Fintech SRO have been discussed in detail as under:

3.1.

Fintech SRO should be a Not-for-profit company

The applicant for Fintech SRO should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013.

3.2. Fintech SRO should state its operation as an ‘SRO-FT’ as its primary objective To ensure transparency and clarity regarding the organization’s mission and operations, it is essential that the Memorandum of Association (MoA) of the applicant company explicitly declares the operation as a primary objective, specifically as an SRO-FT.

Comments Registering the Fintech SRO as a not-for-profit company under Section 8 of the Companies Act, 2013, and explicitly stating ‘SRO-FT’ as its primary objective in the Memorandum of Association (MoA) can contribute to the organization’s transparency, credibility, and focus on its regulatory role within the fintech industry. These steps can help ensure the effective operation of the Fintech SRO and foster trust among its stakeholders.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

3.3.

Fintech SRO should have sufficient Net-worth requirement

The Fintech SRO should have sufficient net worth and demonstrate the capability of establishing the necessary infrastructure to fulfil the responsibilities of SROFT effectively, and consistently. In this respect, the SRO-FT should have a robust IT infrastructure and the ability to deploy technological solutions within a reasonable timeframe.

Comments The framework emphasizes the need for a financially sound Fintech SRO with a strong commitment to building and maintaining the necessary infrastructure, especially in the realm of technology, to effectively and consistently fulfil its regulatory responsibilities. The RBI should specify the exact quantum of net worth requirement to become an SRO.

3.4. SRO-FT should put in place a system for managing ‘user harm’ The SRO-FT should put in place systems for managing ‘user harm’ instances that come to its notice or are referred to by the Reserve Bank or any other stakeholder.

The SRO-FT should not set up entities/offices overseas without the prior approval of the Reserve Bank.

Comments The framework highlights the SRO-FT’s responsibility to address instances of ‘user harm,’ ensuring that it plays a vital role in protecting consumers and maintaining the integrity of the fintech sector. Additionally, the requirement for obtaining prior approval from the Reserve Bank before setting up overseas entities or offices ensures regulatory control and alignment with national objectives.

3.5.

Membership requirements for Fintech-SRO

The criteria for membership requirements are summed up hereunder: Provision

Description

Comprehensive Membership

The applicant SRO-FT should represent the entire FinTech sector, including entities of all sizes, stages, and activities.

The application must include a roadmap for achieving comprehensive

membership

if

representation

is

inadequate at the time of application. Failure to do so may result in denial or revocation of recognition.

Voluntary Membership

Membership of the SRO-FT should consist of FinTechs Membership in the SRO-FT should be voluntary. The Reserve Bank will encourage FinTechs to join a recognized SRO-FT.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

Provision

Description

Domicile in India

The SRO-FT should be an entity domiciled or registered in India. FinTech members of the SRO-FT can be domiciled anywhere.

Reasonable Membership Fee The membership fee structure developed by the SRO-FT Structure

should be reasonable, and non-discriminatory.

Membership Agreement

The

SRO-FT

should

derive

authority

through

the

membership agreements to set rules, standards, codes of conduct, etc., for the members.

Comments: The framework aims to create a well-rounded and effective regulatory framework for the FinTech sector, promoting inclusivity, voluntary collaboration, local presence, fair financial arrangements, and regulatory autonomy through membership agreements.

4. What are the eligibility criteria for the Board of Directors and Key Managerial Personnel of fintech-SRO? 4.1.

Professional Competence and Integrity:

The Board of Directors (BoD) and Key Managerial Personnel (KMP) of the applicant company must possess professional competence and maintain a general reputation for fairness and integrity.

4.2. Legal Proceedings Disclosure Any ongoing legal proceedings against the Applicant Company, BoD, or KMP should be declared during the application process. It is required to demonstrate that such proceedings will not hinder the SRO-FT’s functioning or harm its reputation.

Additionally, individuals associated with the applicant, BoD, or KMP should not have a history of convictions, particularly related to moral turpitude or economic offences.

4.3. Finality of Reserve Bank’s View: The Reserve Bank’s opinion on the fit and proper status of the Applicant Company, BoD, and KMP is deemed final.

4.4. Prescribed Conditions for Public Interest: The Reserve Bank, when granting recognition as an SRO-FT, reserves the right to impose additional conditions if necessary. These conditions aim to ensure that the SRO-FT’s functioning does not become detrimental to public interest.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

Comments: The framework aims to establish a robust and responsible regulatory framework for the SRO-FT, emphasizing professionalism, legal compliance, and protection of public interest under the oversight of the Reserve Bank.

5. How to make an application to RBI for registration as an SRO? The application for registration as an SRO in the Fintech sector needs to be submitted to RBI, in this regard, the RBI would invite applications for the SRO for the FinTech sector, either for the entire sector or for specific sub-sectors, as and when required.

The number of SRO-FTs to be recognised would be considered based on the number and nature of applications received. The application made by the SRO-FT should be accompanied by: Application Requirements

Details

Application Contents

(a) Copy of MoA, Articles of Association, etc. (b) Details of the constitution of the Board (c)

Roadmap for comprehensive membership (if necessary)

(d) Application submitted under Board authorization (e) Reserve Bank may request additional information/ clarification as needed.

Handling

of

Incomplete –

Applications

Incomplete applications or those not meeting eligibility criteria will be either returned or rejected.

–

The Reserve Bank will provide the applicant with an opportunity to be heard before taking such action.

In case where the applicant is deemed suitable, the Reserve Bank would issue a “Letter of Recognition” to the SRO-FT. The recognition granted would be valid subject to the specified conditions.

Reserve Bank would reserve the right to not grant recognition to any SRO-FT. The decision of the Reserve Bank in this regard would be final, subject to providing the opportunity to the SRO-FT to be heard.

6. What are the functions and responsibilities of Fintech-SRO? The framework outlines the functions and responsibilities of the Fintech SelfRegulatory Organization (SRO-FT) within the FinTech sector. It highlights various areas in which the SRO-FT is expected to operate, including standard-setting, oversight, enforcement, developmental activities, and grievance redressal. The function of Fintech-SRO are listed hereunder:

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

Function

Description

Standard-setting

–

Establishing objective, consultative processes to make and establish rules and standards.

–

Framing a customized code of conduct for members based on the nature of their activities.

–

Setting industry benchmarks and technology standards for transparency, disclosure, data privacy, etc.

–

Creating standardized documents for the sector, ensuring compliance with statutory and regulatory requirements.

–

Implementing a mechanism for accreditation in the FinTech ecosystem to improve compliance and professionalism.

–

Developing a code of conduct for responsible advertisements and market standards.

–

Specifying consequences for rule violations and misconduct by members and enforcing them.

–

Establishing structured enforcement functions.

–

Deploying surveillance mechanisms to monitor the sector, detect exceptions, and ensure integrity and compliance.

–

Offering counseling on restrictive and unhealthy practices that could harm sector growth.

–

Promoting understanding of statutory and regulatory requirements and fostering a culture of compliance.

–

Disseminating sector-specific information through various channels to raise awareness among members.

–

Encouraging research and development in the sector by conducting studies, surveys, and discussions.

–

Providing guidance and support, particularly to smaller entities, and sharing best practices publicly.

Grievance Redressal – and Dispute Resolution –

Establishing efficient, fair, and transparent frameworks for member grievance redressal and dispute resolution.

Oversight and Enforcement

Developmental

frameworks

for

oversight

and

Focusing on customer education regarding industry products and services.

7. What are the responsibilities of the Fintech-SRO towards RBI’s regulatory compliances?

Responsibility

Description



Collective-Voice in Engagements with Reserve Bank

The Fintech-SRO are required to act as the collective voice of its members in engagements with the Reserve Bank, addressing broader concerns of the FinTech sector. Ensure equitable treatment for all members.



Reporting Violations

It must notify the Reserve Bank promptly about any violations by its members regarding statutory or regulatory requirements.



Sectoral Information Sharing

Collect and share sector-specific information with the Reserve Bank to aid in policy making. Develop a scalable technology solution for this purpose.



Taxonomy Development

Consult the Reserve Bank in developing and updating the taxonomy for FinTechs.



Task Execution and Data Supply

Carry out assigned tasks from the Reserve Bank, review proposals or suggestions, and provide requested data or information as directed.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

Responsibility

Description



Reporting and Returns

Submit the SRO-FT’s Annual Report and other information to the Reserve Bank. Submit periodic returns as prescribed by the Reserve Bank.



Periodic Interactions

Participate in periodic interactions with the Reserve Bank, adopting a holistic perspective on the FinTech sector when providing views, inputs, or suggestions.



Inspection and Audit

Allow the Reserve Bank to inspect the books or arrange for audits.

Provide required information for inspections/audits, with expenses borne by the SRO-FT.



Compliance with Directions

Comply with other functions and directions specified by the Reserve Bank as required.



Guidance and Facilitation for Regulation

Guide/facilitate the Reserve Bank on the extent, scope, and manner of regulating entities in the FinTech sector.

8. Governance Excellence: Key Principles and Guidelines for SRO-FT Maintaining the highest standards of governance is paramount for the effective operation of the Fintech Self-Regulatory Organization (SRO-FT). To ensure transparency, accountability, integrity, fairness, and compliance with relevant laws and regulations, the SRO-FT adheres to strict governance principles. These principles include conflict of interest management, professional competence of leadership, and prompt grievance resolution. By upholding these principles, the SRO-FT fosters trust and credibility within the financial ecosystem it oversees. Key governance guidelines for the SRO-FT are as follows:

8.1.

Professional Governance Framework

The SRO-FT is professionally managed, with its Articles of Association (AoA) explicitly outlining the functioning of the Board, governing body, and management, addressing conflicts of interest comprehensively.

8.2. Membership Criteria: The AoA should clearly define criteria for admission, expulsion, suspension, and readmission of its members.

8.3. Monitoring ‘Fit and Proper’ Status: The Board establishes a framework for ongoing monitoring of the ‘fit and proper’ status of its directors. Any changes in directorship or adverse changes in fit and proper status are to be promptly reported to the Reserve Bank.

8.4. Independence of Members: At least one-third of Board members, including the chairperson, are independent and have no active association with a FinTech entity.

8.5. Human Resources and Technical Capability: The Board ensures that the SRO-FT has adequately skilled human resources and robust technical capabilities to monitor the sector effectively.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

8.6. Reserve Bank Oversight: If deemed necessary, the Reserve Bank may nominate or depute Observer(s) on the Board of the SRO-FT to provide regulatory oversight.

These guidelines emphasize the commitment of the SRO-FT to maintain governance excellence, ensuring responsible oversight and adherence to best practices within the FinTech sector.

9. Conclusion The Draft framework for Self-Regulatory Organizations in the FinTech sector represents significant progress towards creating a robust regulatory environment that not only safeguards the interests of consumers but also fosters innovation and growth in this dynamic industry. It highlights the importance of collaboration between industry stakeholders and regulatory bodies to ensure the continued success of FinTech in India.

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

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Fintech- Self-Regulatory Organizations (SROs) and RBI: A Regulatory Symbiosis in the Digital Age

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