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Financial Sector Self-Regulatory Organizations (SRO)

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September 23, 2024

Why in News?

In August, the Reserve Bank of India (RBI) recognised the Fintech Association for Consumer Empowerment (FACE) as a self-regulatory organisation (SRO) in the financial technology (fintech) sector.

What is a self-regulatory organisation (SRO)?

  • Self-Regulatory Organizations (SRO) - These are usually non-governmental organizations, established to regulate certain professions or industries to promote order among businesses and organizations.
  • They act as a bridge between industry players and the regulator.
  • SROs accomplish control through internal mechanisms that regulate the flow of business operations.
  • Functions of SROs -The primary function of this SRO is
    • To represent all stakeholders
    • Set standards and best practices
    • Establishing and enforcing regulatory standards
    • Promoting ethical behaviour and market integrity
    • Fostering transparency and accountability among members
    • Collect data, monitor and report violations
    • Address grievances, resolve disputes
    • Raise customer awareness and protect them
    • Support research and development
    • Complement existing regulatory and supervisory arrangements.
  • FinTech SRO (SRO FT) - They have membership from fintech’s currently regulated by the RBI, including non-banking financial companies-account aggregators (NBFC-AA), NBFC-peer-to-peer (P2P) lending platforms, among others, excluding banks.
  • Regulations of SRO - The Reserve Bank of India   recognizes SRO in banking and fintech sector and SEBI in the capital market sector.

SROs regulated by SEBI

  • Association of Merchant Bankers of India (AMBI)

AMBI was granted recognition to set up professional standards for providing efficient services and establish standard practices in merchant banking and financial services.

  • Association of Mutual Funds of India (AMFI)

It is the SRO of mutual funds organizations.

  • Registrars Association of India (RAIN)

The Registrars Association of India (RAIN) a self-regulatory organisation for registrars to an issue and share transfer agents has been set up.

 

SROs regulated by RBI

  • Foreign Exchange Dealers’ Association of India (FEDAI) –It was formed as an association of banks dealing in foreign exchange (authorised dealers) and is incorporated under Section 25 of the Companies Act, 1956.
  • Fintech Association for Consumer Empowerment (FACE)-  It is a self-regulatory organisation (SRO) in the financial technology (fintech) sector.
  • NBFC Microfinance SROs - Sa Dhan and Microfinance Institutions Network (MFIN).

What are the benefits?

  • Facilitate open communication - Through regular consultations, feedback, and policy dialogues, the SROs facilitate open communication and help fintech’s remain informed about regulatory expectations.
  • Expertise – SROs are widely considered experts in their fields and, therefore, know a great deal about the markets they work in.
  • Higher standard of conduct – With the establishment of SROs, member organizations follow a certain standard of conduct that helps promote ethical ways of doing business.
  • Boost confidence – High standard of conduct can lead to investors and consumers becoming more confident in the market.
  • Saves public money – SROs do not rely on people’s taxes but are instead funded by the organizations that are under its wings.
  • Therefore, the government is able to save by foregoing the need to maintain an agency for such a purpose.

What are the challenges?

  • On Boarding – There is initial low momentum in onboarding members under the self-regulatory bodies.
  • There has not been any SRO for the banking system and most of them functions as mere associations.
  • Heterogeneous entities - Since NBFC sector is heterogeneous, limiting the number of SROs to two will affect their effectiveness.
  • Big Entitles - The most influential technology companies such as Alphabet (Google), Apple, Meta (Facebook), Amazon and Microsoft offer various financial and non-financial services.
  • There is lack of guidelines about their inclusion under the SROs.
  • Diverse functions - Many entities are involved both in lending and payments and are directly regulated for certain activities, but indirectly regulated for others.
  • The coverage of these entities under an SRO poses challenges.
  • Uncertainty in Roles - There is a lack of clarity on the roles of fintech’s that are associated with lending and payments companies.

Way forward?

  • Encourage and incentivise entities to get registered under self-regulatory organizations.
  • Set up SROs for different segments, based on the principal activities and the chain of entities involved.
  • Treat regulated and unregulated entities differently.
  • Avoid overlap for the effective implementation of the SRO regime.

Quick Facts

  • Indian Banks’ Association (IBA) – It was established in 1946 as an interface between banks, the RBI, and the government.
  • It is not an SRO.
  • Association of Small Finance Banks of India- It is a body representing small finance banks.
  • It is also an association, not an SRO.
  • Finance Industry Development Council – It was established in 2004 and represents NBFCs, particularly those involved in lending.
  • It’s an industry body, not an SRO.

References

Business Standard| SROs in finance sector

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