The FinTech industry in India is going through a tremendous metamorphosis right now, which is changing how financial services are provided and used. This article examines how FinTech is developing in India, what is causing it to flourish, and how the introduction of Self-Regulatory Organisations (SROs) has changed the country’s regulatory environment.

 The Fintech ecosystem’s extraordinary expansion in recent years has also prompted RBI to gradually change its approach to Fintech regulation, moving from simple disclosure-based requirements to light oversight and regulation, strict restrictions, and ultimately full-fledged supervision. The RBI has highlighted the exponential growth of Fintechs and expressed support for their expansion in a number of public forum conversations. On the other hand, the RBI has also stated that Fintechs must operate within clearly defined boundaries so that they can develop appropriately, taking into account customer interests and avoiding systemic hazards. As a result, RBI’s plan to establish a self-regulated organization—which will act as a middleman between the RBI and Fintechs as well as the RBI and the RES—has emerged as one of the most significant regulatory developments of the past year.

 It is anticipated that the self-regulatory organisations (SROs) will serve as a liaison between the RBI and Fintechs as well as the RBI and REs. The general principle-based regulations of the RBI will specify the code of conduct, business ethics, and specific business practices for SROs.

The RBI Norms

A framework for Fintechs and RES to identify SROs. On January 15, 2024, the RBI released the Draft Fintech SRO Framework for public discussion.

The proposed guidelines from the RBI recognize the need to adjust regulatory frameworks to account for the diversity of fintech companies. Experts in the field emphasize how crucial it is to address the crucial areas of financial services, such as investments, loans, insurance, and payments. It is preferable to create a distinct SO for every function in order to regulate each service efficiently.

Experts stress that the RBI must take into account a variety of business models, an applicant’s capacity for reaching consensus on difficult issues, and the upholding of consensus-based decision-making among members when considering the licensing of SROs. The efficacy of self-regulation in the fintech industry is contingent upon the qualifications and abilities of prospective applicants as well as the diversity of membership.

So what is the main need for SROs?

• Fostering Responsibility: SROs, which address concerns like market integrity, data protection, cybersecurity, and risk management, are essential for the responsible expansion of the fintech industry.
• Handling Unethical Practices: The necessity for SROs is highlighted by instances of unethical behaviour by some finch participants, including as raising interest rates and harassing borrowers.

Key SRO Characteristics

• Impartial Governance: SROs maintain impartial oversight of self-regulation, guaranteeing industry participants’ acceptance of penalties and disciplined operations.
• Beyond sector Interests: In order to safeguard employees, clients, and ecosystem participants, SROs go beyond the sector.
• Supplementary Role : SROs complement existing laws and regulations without replacing them.

Here are some of the Functions & Benefits of an SRO

1. Standardisation: Creating and enforcing industry-specific rules and regulations is one of SROs’ main responsibilities. These standards outline the appropriate behaviours, methods, and operational procedures for member firms in the industry. SROs have the advantage of having strong ties to the sector, which enables them to develop practical and nuanced regulations that take into account the dynamics of the sector. For example, SROs such as FINRA in the US implement regulations in the securities business to guarantee investor safety and fair trading practices.

2. Industry Knowledge: SROs are made up of people and delegates from the sector they oversee. This composition combines a multitude of experience and understanding on the nuances of the industry. Because of their experience, SROs are able to develop laws that are both thorough and pertinent to the unique problems faced by the sector. SROs can effectively handle evolving trends and dangers by customising regulations based on the expertise of industry practitioners. In the derivatives market, for example, the National Futures Association (NFA) gains from the direct participation of market participants in the creation and implementation of regulations.

3. Monitoring and Surveillance: SROs are essential in keeping an eye on the operations of their member companies to make sure that rules are being followed. SROs are able to identify any wrongdoing, anomalous trading patterns, and market manipulation through the use of sophisticated monitoring systems and data analysis. Early detection of anomalies guards against fraud and preserves the integrity of the market. To keep an eye on the commodities futures and options markets, the Commodities Futures Trading Commission (CFTC) in the USA works with SROs.

4. Investor/Client Protection: Within their particular industry, SROs frequently place a high priority on protecting investors and consumers. To help investors and clients make educated decisions, they set regulations requiring members to provide accurate and clear information to clients. SROs can provide as a forum for clients and investors to air grievances and look for solutions. In the UK, financial firms and consumers can resolve disputes through the Financial Ombudsman Service (FOS), which acts as an impartial mediator.

5. Effective Dispute Resolution: SROs usually have procedures in place to settle disagreements amongst members of the industry as well as between members and clients. When compared to court cases, these procedures can save time and money. SROs help parties find mutually beneficial solutions by facilitating problem-solving and resolution processes through arbitration, mediation, and other conflict resolution procedures. Investor and brokerage company complaints can be resolved through the arbitration system run by the Financial Industry Regulatory Authority (FINRA).

6. Flexibility and Innovative Thinking: When it comes to adapting to new issues and technological developments, SROs are frequently more innovative and nimble than government regulatory organisations. Because of their adaptability, they can quickly adjust to dynamic changes in the industry landscape and put new policies or procedures into place as needed. For example, the PCI Security Standards Council, an SRO that handles security issues in the payment card industry, maintains the Payment Card Industry Data Security Standard (PCI DSS).

7. Economical Regulation: SROs can offer an economical method of regulation. The load on taxpayers is lessened since industry participants pay membership fees to support SRO activities. This funding approach guarantees that the organization’s resources are allocated to efficient oversight and encourages the industry to self-regulate.
   Therefore, in the financial services business, self-regulatory organisations are essential to upholding industry standards, protecting investors and clients, and preserving market integrity. They are important collaborators in the regulatory ecosystem because of their capacity to draw on industry knowledge, craft customised regulations, and react quickly to shifts in the business environment. The advantages of SROs in promoting efficient and effective regulation are very evident and far outweigh these occasional challenges, even though challenges like conflicts of interest, regulatory capture, limited enforcement power, and inconsistent standards may exist in certain situations and contexts.

Let’s talk about some of the Global Practices and SRO Case Studies:

Self-regulatory organizations (SROs) are global players that help regulate a number of different industries. The following three case studies showcase global practices and insights gained from various nations’ experiences:

1. The Financial Industry Regulatory Authority (USA) is known as FINRA.
   A well-known SRO in the US that regulates broker-dealers and securities companies is the Financial Industry Regulatory Authority (FINRA). Its methodology, which emphasises investor protection and market integrity, exemplifies successful industry self-regulation.

Important characteristics:

Extensive Regulation: Financial reporting, sales conduct, trading procedures, and other facets of the securities sector are all covered by the strong regulatory framework that FINRA has created.
Communication and Transparency: FINRA keeps communication open by being transparent in the rule-making process and by offering investors educational materials. It runs BrokerCheck, a resource that lets investors look up the backgrounds of brokers and companies.
Enforcement and Surveillance: FINRA employs cutting-edge technology to keep an eye on trade activity and identify instances of market manipulation and abnormalities. It uses fines, suspensions, and disciplinary measures to enforce rules.

2. Financial Services Authority (FSA) (Japan): The Financial Services Authority (FSA) in Japan is a prime example of how SROs have developed and how they have worked with government agencies to address financial crises.

Important characteristics:

The transition from Self-Regulation: The Financial Services Agency (FSA) changed from being primarily a self-regulatory organization to a more powerful government regulatory agency after the collapse of significant financial firms in Japan.
Enhanced Cooperation: In order to preserve a balance between government authority and sector competence, the FSA retained industry participation through advisory councils even as it moved towards more regulatory scrutiny.

3. ASIC, or the Australian Securities and Investments Commission: By fusing government supervision with SRO principles, ASIC serves as an example of the efficacy of collaborative regulation.

Important characteristics:

Dual Approach: To promote cooperation between government authorities and industry players, ASIC functions as both an SRO and a government regulatory body.
uniform Oversight: By working together, ASIC makes sure that different financial services business segments have uniform regulatory oversight, which improves investor protection.

What effects will several SROs have on the fintech sector?

Due to the fintech industry’s dynamic environment, experts are recommending the creation of several self-regulatory organisations (SROs) to accommodate the various business models that are present in the industry.

The action is being taken in response to the Reserve Bank of India’s (RBI) recent release of a draft framework that describes the roles, standards of governance, and requirements for possible SROs in the fintech industry.

Anticipating novel business models to enter the fintech sector in the future, which calls for numerous SROs to efficiently oversee and regulate the sector, is what is driving the push for many SROs.

A number of representative organizations have indicated their desire to actively participate in the regulatory system by applying for SRO licenses.

Based on the nature of their work, the fintech industry is currently represented by four major associations: Digital Lenders Association of India (DLAI), Fintech Convergence Council, Payments Council of India (FCC), and Fintech Association for Consumer Empowerment (FACE). Different market groups are served by each association, including payment aggregators, prepaid instrument issuers, software-as-a-service providers, micro-small and medium-sized enterprise lenders, and lenders that deal directly with consumers.

These industrial associations, which run on a membership basis, seek to mobilize industry views on matters of policy and regulation.

Representative organizations such as FACE actively encourage their members to borrow and lend responsibly.

Conclusion

In the dynamic realm of financial technology (Fintech), the interplay between innovation and regulation is a critical factor shaping the industry’s trajectory. Our report provides a comprehensive examination of the intricate regulatory landscape governing Fintech enterprises.

Moreover, the report delves into the changing landscape of regulations, providing insights into recent regulatory advancements and upcoming rules that are transforming the Fintech landscape. It offers valuable insights for industry stakeholders, policymakers, and investors by detailing the purpose behind such regulation and its impact on businesses.

Embark on the Journey  [Read the full report here]