Fintech industry associations are actively preparing to christen themselves as self-regulatory organisations.
Both Fintech Association for Consumer Empowerment and Digital Lenders Association of India are directing their efforts in the hope of becoming SROs for the fintech space, according to their officials.
While there are no SROs in the fintech space, the Reserve Bank of India has been encouraging the industry to set them up to reduce the regulatory burden on the central bank.
An SRO is a non-governmental organisation that sets standards and rules for the conduct of entities in the industry. The idea is to protect consumers, vouch for transparency, and fair competition.
“SROs are not about preventing something bad from happening but more about regulating behaviour. Whatever the regulators say, they make it intelligible for market participants to understand and adapt,” according to Jaikrishnan G, partner-financial services at PwC India.
“One of the key aspects of becoming an SRO is for you to demonstrate that you actually have an oversight on your market participants and that they listen to what you are promoting as an SRO,” said Vivek Iyer, member at FACE and partner-financial services risk advisory, Grant Thornton Bharat.
BQ Prime reported earlier this week that the RBI is working with Payments Council of India for building the first SRO for the Indian fintech industry.
Fintech Association For Consumer Empowerment
FACE applied to become an SRO in January 2022. Recently, it released a new code of conduct, based on seven principles, binding on all its members.
“The earlier code of conduct focused on customers. But this time, there is greater focus on governance as well as customer conduct,” said Iyer. “…the sole objective of this code is to build trust in the digital lending ecosystem and focus on regulating its customers,” he said.
Any company that wants to be a member needs to sign up to the code of conduct and follow it. It is not just a condition for membership but also a prerequisite for its renewal, according to Sugandh Saxena, chief executive officer, FACE.
“At the time of onboarding, we take a declaration that they would abide by the code of conduct. Hence, it is the most important document in terms of onboarding of any member and is binding on them,” said Saxena.
But as of now, there is no negative incentive for not complying, according to Iyer. “The focus is on ensuring that a stronger culture comes from this group and each member follows it,” he said.
FACE, however, is in the process of forming an independent enforcement committee and expects to constitute it in the next three months, according to Saxena. The committee would not just address instances of non-compliance but also provide guidance to FACE on matters of importance.
“We are approaching candidates outside FACE who have experience in the financial sector and digital lending space. This would ensure that they are not influenced by their membership. We are looking at having three people to begin with,” said Saxena.
Another thing that is also under consideration is how to do an independent audit on the code of conduct, according to a person associated with FACE, who spoke on the condition of anonymity.
The idea is how FACE as an association will do an independent review of the member companies, whether it will be a self-assessment by the organisation or some other way is a subject matter of discussion and is still one year away, said the person quoted above.
Digital Lenders Association Of India
During its meetings with senior RBI officials, the industry body has indicated its willingness and readiness to be recognised as an SRO, according to Jatinder Handoo, chief executive officer of Digital Lenders Association of India.
“We function like an SRO but we are not recognised by the RBI as of now. However, on the readiness side, we are ready with a code of conduct, adequate membership, fully functional secretariat, and even with a customer grievance redressal mechanism in place, elements which are necessary for a fully functional SRO,” Handoo said.
Similar to FACE, even DLAI has its code of conduct which is binding on its members. However, in case of non-compliance, the body takes a note of this and reports the matter to the concerned department of the RBI through its periodic update, he said.
“Apart from passing on the information to the RBI, we also put non-compliant entities in a grey list. However, this list is not permanent, it gets reviewed if a company complies in future.”
Self-Regulation Is The New Regulation
In terms of market size, the Indian fintech ecosystem is the third largest, according to an October 2022 report by Invest India.
The fintech market also saw record funding, jumping three times to reach $7.8 billion in 2021, as compared with $2.5 billion in 2017, according to a Chiratae Ventures and EY report from August 2022.
Seeing the rapidly growing space, the need for self-regulation and SROs is only rising, according to experts.
“Given the volume and growth of transactions, and the variety of different elements, it is important that we grow in a self-regulated manner,” said Jaikrishnan.
"Industry bodies taking up ownership is actually a good thing and I see no harm in it," said Monica Jasuja, an independent consultant. It’s a two-way communication–one is for the associations to have their representation and the other is to hear from the RBI. If anything, it’s good for the industry, she said.
“Imagine the RBI having to hear representations from so many fintechs, it would be so difficult. But by having such bodies, it would be easier for them to listen to the voice of the industry as a whole, rather than sum of parts that make a whole.”
Lately, the direction that the regulators have been taking is less of regulation and more of enablement, said Jaikrishnan. “As a group of active participants, it is the fintechs' role to come in and make those frameworks, and put them to the best of use. It has worked in the past, it will definitely work,” he said.
RECOMMENDED FOR YOU
'Seeks To Establish Jungle Raj': Why Centre's New Labour Codes Face Red Flag In Left-Ruled Kerala
Stock Picks Today: Axis Bank, Tata Consumer, PB Fintech, Dr Reddy’s And More in Brokerages’ Latest Notes
New Labour Code: Will Eternal, Swiggy And Urban Company Face Higher Costs? Brokerages Weigh In
New Labour Code: Will Your Take-Home Salary Reduce? Here's All You Need To Know
POPULAR