The finance sector in India has been revolutionized by financial technologies with prominent FinTech participants such as PhonePe, Paytm, PolicyBazaar, Razorpay, Paypal, Zerodha, etc. The rapid expansion of these FinTech companies and widespread acceptance by a large population raises serious concerns relating to various aspects including but not limited to customer protection, data privacy, cyber security, grievance handling, etc. In an attempt to minimise these risks and pave way for a regulated FinTech sector, the Reserve Bank of India (“RBI”) vide its notification dated May 30, 2024 published the Framework for Self-Regulatory Organisation(s) in the FinTech Sector (“Framework”). The key highlights of this Framework are covered below.

Background

Key definitions

1. FinTech(s) (“FT”): FTs are 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.
2. Self-Regulatory Organizations(s) (“SRO”): SRO means an industry-led entity responsible for establishing and enforcing regulatory standards, promoting ethical conduct, ensuring market integrity, resolving disputes, and fostering transparency and accountability among its members.
3. User Harm Instances: User harm instances may include fraud, mis-selling, unfair practices, unauthorised transactions, or any other form of misconduct that harms consumers of financial services.

Eligibility and Membership Requirements for an applicant FinTech Self-Regulatory Organisation(s) (“SRO-FT”)

A. General Eligibility requirements:  In order to be established as an SRO-FT, the applicant shall fulfil the following general requirements:

1. Constitution: Applicant must be a not-for-profit company registered under Section 8 of the Companies Act, 2013.
2. Structural Diversity: No entity shall hold 10% (ten percent) or more of its paid-up share capital, either singly or acting in concert.
3. Purpose: The Memorandum of Association (“MoA”) of the applicant organization should explicitly state ‘operation as an SRO-FT’ as its primary objective.
4. Minimum Networth: The applicant should have a minimum net worth of Rs.2 Crores, either within a period of one year after recognition as an SRO-FT by RBI, or, before the commencement of operations as an SRO-FT, whichever is earlier.
5. Capability to establish necessary infrastructure: SRO-FT should demonstrate its capability to establish necessary infrastructure to fulfil the responsibility of SRO-FT effectively and consistently. It should develop a robust IT infrastructure and the ability to deploy technological solutions within a reasonable timeframe.
6. Mechanisms to face user harm instances: SRO-FT should put in place systems for managing ‘user harm’ instances that comes to its notice or are referred to it by the RBI or any other stakeholder.
7. Bar on overseas entities: SRO-FT shall not set up entities or offices overseas, except with the prior approval of the RBI.

B. Membership Criteria: In addition to the general requirements, the applicant must meet the following membership criteria as well.

1. Composition of Members: An applicant SRO-FT should comprise of members who are FT entities, primarily those FTs that are not regulated by any other financial sector regulator. However, membership may also be open to regulated entities, other than banks.
2. Adequate representation of the FT Sector: It should have an adequate representation of the FT sector with membership across entities of all sizes, stage and activities. The member FTs could be domiciled outside India as well.
   (Note: In case of inadequate representation at the time of application, applicant may submit a roadmap for achieving it within a reasonable time. However, failure to meet it would lead to refusal/revocation of the recognition granted.)
3. Reasonable and non-discriminatory membership fee structure: Every member FT shall pay a membership fee to the SRO-FT. The membership fee structure developed by SRO-FT must be reasonable and non-discriminatory. Membership fees may differ based on size, intent, capability, etc., however it should be ensured that there is no discrimination in membership, i.e. all FTs shall enjoy equal rights.
4. Voluntary Membership: The membership of the SRO-FT should be voluntary. However, FTs would be encouraged by the RBI to become a member of a recognised SRO-FT.
5. Authority through membership: The SRO-FT should derive its authority through the membership agreements to set rules, standards, codes of conduct, etc., for its members.

C. Fit and proper criteria for Board of Directors (“BoD”) and Key Managerial Personnels (“KMPs”): The Framework prescribes the following conditions to be fulfilled by the BoDs and KMPs of the applicant SRO-FT:

1. Qualifications of BoD and KMPs: The BoD and KMPs shall possess professional competence and a reputation for fairness and integrity.
2. Disclosure of legal issues: Any legal proceeding against the SRO-FT, BoD or KMP should be disclosed as part of the application. Additionally, it must be demonstrated that such proceedings shall not impede the functioning of the SRO-FT or harm its reputation. Further, the applicant/ any members of the BoD or any KMP should not have been convicted of any offence including moral turpitude / economic offence in the past.
   (Note: While granting recognition as SRO-FT, the RBI would, if deemed necessary, prescribe such other conditions as may be required to ensure that functioning of the SRO-FT does not become detrimental to public interest.)

D. Application Requirements: Once the above criteria are met, the applicant may proceed to submission of the application to RBI. The following are the key points to be noted:

i. Supporting documents required: Application must be accompanied by:

1. a copy of the MoA, AoA, etc., of the proposed SRO-FT;
2. details of the constitution of its Boards, roles/responsibilities of its management, and the manner in which its operations would be undertaken; and
3. roadmap and timeline to achieve comprehensive membership, if necessary.
4. detailed justification of how it acquires or intends to acquire the characteristics of an SRO-FT
5. detailed exposition of how it undertakes functions or proposes to undertake the functions of an SRO-FT
6. any other information or clarification as may be required by the RBI

ii. Submission of Application to RBI: Application may be submitted under the authorisation of the Board, by any representative organisation, i.e., any FT organization who is a member of the SRO-FT or who have explicitly conveyed its intention to be a member in the future.

E.  Processing the Applications: Where applicant is suitable, RBI issues a “Letter of Recognition” to the SRO-FT. RBI also reserves the right not to grant recognition to any SRO-FT. In case of incomplete applications or applications not meeting the eligibility criteria would be returned/rejected. However, prior to returning/rejecting, RBI would provide the applicant with an opportunity of being heard.

Conclusion

The RBI Framework introduces the concept of self-governance of the FT industry and is a significant step towards bridging the gap between regulator and the FT industry. It is anticipated that this culture of self-governance would be able to address the present challenges effectively and aid in a robust environment that maximises the potential of FTs.

Please find a copy of the Framework, here.

This update has been contributed by Jitendra Soni (Partner) and Abhirami Retheev (Associate).

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