Introduction
The Reserve Bank of India (‘RBI’), in an effort to encourage self-regulation in the FinTech Sector, released the framework for recognizing Self-Regulatory Organizations for the FinTech Sector (‘SRO-FT’). The entities willing to register as SROs under the framework must submit an application form along with the required documents.
Key Provisions of the Framework
The framework for SRO-FTs includes its functions, application procedure for recognition and formalities that may be required to be fulfilled. The framework has been divided into 5 chapters, which have been summarized as follows:
1. Need for SRO-FTs
Technological advancements in the finance sector have led to the emergence of FinTech companies. However, there is a rising concern for customer protection, data privacy, grievance handling, etc., which has led to the need to create a balance between maximizing the creative potential of FinTech and the need to mitigate the risk they may pose to the financial sector. Self-regularisation could be one measure to achieve this balance.
2. Characteristics and Operations
RBI shall maintain oversight over the SRO-FTs, which should endeavour towards a holistic development of the FinTech sector. SRO-FTs shall have the following characteristics:
i. SRO-FTs are required to maintain a representative character and foster growth in the FinTech sector. Through comprehensive membership agreements, the SRO-FT defines rules, sets standards for the FinTech community, and effectively monitors and enforces them.
ii. The approach of SRO-FTs should be development-oriented. It prescribes minimum eligibility criteria for its members and provides knowledge to its members via guidance and training programs. It is to provide handholding to the members in their early stages and formulate forward-looking policies.
iii. SRO-FTs should maintain their independent character and not let any member group influence their decisions; this will minimize the risk of reputational loss with their members.
iv. SRO-FTs are required to act as arbiters of disputes between its members. It is to maintain a transparent identity and strive to bring a fair resolution to the disputes arising among its members.
v. SRO-FTs are required to empower themselves with powers to investigate and take disciplinary action against its members in the event of any violation of its rules, byelaws or standards.
vi. SRO-FTs are required to set up a repository containing the information relating to its members.
3. Eligibility and Membership
General Requirements for registration as an SRO-FT are enumerated as follows:
Basis | Requirement |
Compliance with the Companies Act |
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Board of Directors (‘BODs’) |
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Net Worth | Minimum of INR 2,00,00,000/- (Indian Rupees two crores) within a period of One year after recognition as an SRO-FT by the RBI or before commencement of operations as an SRO-FT (whichever is earlier). |
Other requirements |
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Membership Criteria
The SRO-FT should be an entity domiciled in India, which may have members domiciled outside India. It should demonstrate its representative character at the time of application or provide a roadmap to achieve the desired memberships.
Application procedure – the procedure to register as an SRO-FT is as follows:
Any representative organization may file an application for registration as an SRO-FT. The representative character should be demonstrated at the application stage by way of actual or intended memberships.
The membership should primarily consist of unregulated FinTech companies.
A copy of the MoA, Articles of Association (‘AoA’), details of the constitution of the board, along with the roles and responsibilities of management should be attached to the application form, along with the roadmap to achieve the desired membership (if necessary).
The application should include a detailed justification of how the applicant intends to acquire the characteristics of an SRO-FT and how it undertakes or proposes to undertake the functions of an SRO-FT.
Recognition
If the application meets the necessary criteria for recognition, the RBI will acknowledge the Organisation as an SRO-FT. However, this recognition is subject to the accuracy of the applicant's representations and may be revoked if the SRO-FT's operations are found to be detrimental to the public interest.
1. Functions and Responsibilities
An entity that is recognised as an SRO-FT has the following responsibilities towards its members and the RBI as listed below:
1. | Responsibilities towards its members |
To guide the conduct of its members. | |
To oversee the conduct of its members. | |
To promote the understanding of statutory and regulatory requirements. | |
To resolve the disputes arising among its members | |
2. | Responsibilities towards RBI |
To represent the voice of its members to RBI. | |
To update the RBI on any developments. | |
To share up-to-date sectoral information with RBI | |
To consult RBI in developing a taxonomy for FinTech. | |
To undertake any tasks assigned by the RBI. | |
To facilitate the collection of market intelligence. |
5. Governance and Management
Owing to its representative nature, it is crucial for the entity recognized as an SRO-FT to maintain high standards of good governance. It is necessary that impartiality is the essence of decision-making. If deemed necessary, after providing an adequate opportunity, any member of the board may be removed by the RBI.
Our Analysis
Self-regulation may catalyze a ground-breaking transition within the current regulatory landscape, particularly amidst concerns regarding the legality of FinTech companies’ operations. This initiative holds the potential to forge a balance between the regularization of the FinTech industry and its creative potential. The establishment of SRO-FTs is anticipated to foster growth in the sector, benefiting its members and regulatory bodies like the RBI, thus serving as a dual catalyst for industry advancement.
Authored by Rosy Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.