Financial Sector Self-Regulatory Organizations (SRO)

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.

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.

References

Business Standard| SROs in finance sector