The Reserve Bank of India has approved the Fintech Association for Consumer Empowerment as the fintech industry’s first self-regulatory organisation (SRO-FT). Jitendra Soni explains how this will help capitalise on its growth potential while addressing the specific risks it poses to the financial system.

What is SRO-FT?

AN SRO-FT IS an industry-led entity that establishes and enforces regulatory standards, promotes ethical conduct, ensures market integrity, resolves disputes, and fosters transparency and accountability among its members. It operates under the oversight of the Reserve Bank of India (RBI). As per the framework, a fintech entity can join multiple SROs and are encouraged to participate in at least one. The SRO-FT should be a fair and transparent arbiter of disputes, fostering a stable fintech environment. The SRO-FT should guide members to align with regulatory priorities, facilitate communication with the RBI, and enforce compliance while supporting innovation and consumer protection. Additionally, it should collect and share data on member activities to aid research, trend analysis, and policymaking, enhancing sector development and resilience.

Benefits of self-regulation

FROM THE REGULATOR’S perspective, self-regulation can help achieve the delicate balance between maximising the creative potential of fintechs while minimising the idiosyncratic risks they pose to the financial system. From an industry participant’s perspective, self-regulation fosters a culture of self-discipline, high levels of internal governance and an environment conducive to an organised and orderly development of the sector. Overall, this approach enables the industry to adapt effectively to rapid technological advancements and evolving market dynamics.

FACE as the first SRO-FT

FINTECH ASSOCIATION FOR Consumer Empowerment (FACE) is a self-regulatory industry body for fintech lenders in India. Founded in the year 2020 by the fintech lenders Cashe, LoanTap, Fibe, KreditBee and Paysense, it has nearly 50 members today, collectively accounting for 80% of India’s digital lending business volume.

On August 28, 2024, the RBI recognised FACE as India’s first SRO-FT. FACE promotes responsible lending and borrowing by setting industry standards and ensuring ethical practices among its members.

How will the SRO-FT ensure that entities comply with the regulations?

AN SRO-FT IS tasked not only with framing various codes and standards for its members but also specifying the consequences for violations and enforcing them. These standards include code of conduct, industry benchmarks, standardised documents, accreditation mechanisms, advertising guidelines, baseline governance standards, and data protection and statutory compliance requirements. It can enforce its standards by monitoring activities of industry participants, imposing reasonable penalties and taking actions such as counselling, cautioning, reprimanding and expelling members. Fintech entities may be barred from membership temporarily or permanently, if necessary.

Eligibility and membership criteria

AN APPLICANT SRO-FT must be a not-for-profit company registered under Section 8 of the Companies Act, 2013, with diversified shareholding where no single entity holds 10% or more of the share capital, either individually or in concert. Within a year of recognition or before commencing operations (whichever is earlier), it must have a minimum net worth of Rs 2 crore.  

It must represent the fintech sector with fintech entities of all size, stage and activities as members, with membership being voluntary. It must be based in India but can include fintechs from outside the country. Membership should primarily consist of fintechs not regulated by any financial sector regulator, although it may also include regulated entities, excluding banks. Membership agreements must be drawn to set rules, standards, codes of conduct, etc., for its members. The application must include a detailed justification of how it will meet the characteristics of an SRO-FT and a comprehensive explanation of how it will perform the responsibilities and functions under the SRO framework.

Impact on the industry

DESPITE ITS PROMISE to accelerate credit access, the fintech industry has faced numerous challenges. Unscrupulous digital lending players with abusive practices attracted intense scrutiny from enforcement agencies, affecting even the most legitimate fintechs. This, coupled with uncertainties around first loss default guarantee (FLDG) structures with lending entities and regulatory compliance issues, had made it difficult for fintechs to operate smoothly. Simply put, it has been caught between the governance norms imposed by regulated entities and the regulatory scrutiny targeting fringe players. In this context, FACE’s recognition as an SRO-FT is crucial, offering fintechs an opportunity to set their own standards and self-regulate.

This article was originally published by the Financial Express.

This article has been written by Jitendra Soni (Partner).