Mint Road, on December 21, 2023, flagged the role of self-regulatory organisations (SROs) in strengthening the compliance culture in regulated entities (REs) and providing a consultative platform for policymaking.
It also decided to issue an omnibus framework for SROs.
In the financial technology (fintech) sector, the Fintech Association for Consumer Empowerment has received the Reserve Bank of India’s (RBI’s) nod for an SRO; another applicant is the Digital Lenders Association of India (DLAI).
There have been whispers that the Indian Banks’ Association and the Payments Council of India are also to jointly set up an SRO for digital payments.
Then, you have the Finance Industry Development Council, Business Correspondent Federation of India, and the National Urban Cooperative Finance and Development Corporation, which have lined up for SRO status.
It looks like more than one SRO for every sector may well be the norm over time.
Microfinance institutions have two SROs: Microfinance Institutions Network and Sa-Dhan. Now this raises some issues. Take fintech.
Just about every other legacy RE will have some of its businesses — be it wholesale or retail credit, insurance, mutual funds, or processes like onboarding — intersecting with specialised fintechs in these areas.
According to Mint Road, by pivoting towards a culture of self-governance, fintechs could proactively set and adhere to industry standards and best practices.
This approach could empower them to demonstrate a commitment to responsible conduct and innovation even in the absence of formal regulation.
Through collaboration, the industry could collectively identify and address challenges, foster an environment where innovation flourishes, and guide a shared commitment to ethical business practices.
But will a proliferation of SROs lead to coordination issues with the chance of each pulling in a different direction?
As Jatinder Handoo, chief executive officer of DLAI, views it, fintech is a diverse landscape and part of a larger digital economy.
“If we look around, there are innovative business models that are emerging rapidly, including transformations in banks.
"Because of the diversity of business models, there is a need and room for more fintech SROs,” he says.
Irrespective of RBI’s recognition status, going forward, one should be prepared to see the emergence of more and more industry associations and groups performing sectoral advocacy and self-regulation functions, working closely with regulators, policymakers, and other market participants.
“I don’t believe there could be any coordination issues due to the multiplicity.
"It’s not a zero-sum game. If anything, it will bring more stability to the industry,” Handoo adds.
Now, what if other financial sector regulators were also to latch on to the SRO idea? How does coordination happen between them in the case of conglomerates?
According to Anish Mashruwala, partner at JSA Advocates and Solicitors (and co-Chair of the finance practice and head of its banking and finance group), a conglomerate is anyway exposed to five different regulators.
“So, if you are a conglomerate with different businesses, let’s say, you have an insurance arm, a non-banking financial company (a housing finance company), and you also have a factoring platform, you are going to have those independent businesses anyway subject to different regulators.
And your particular entity in that conglomerate, which is overseen by a particular regulator, will effectively take best practices, which the industry as a whole, in the SRO, will lobby for,” he explains.
The other concern is as follows: The hunt for independent directors (IDs) on the board of SROs.
Mint Road’s draft omnibus framework for SROs states that at least a third of an entity’s board of directors, including the chairperson, must be independent.
This will not only increase the demand for IDs but also raise a related aspect: How many will raise their hands to come on the board of an SRO? In the case of private banks, IDs are said to have expressed the view that they have day jobs too, and it’s not worth their while to get involved in ‘executive’ matters.
Industry sources are of the view that not many will be willing to be on the board of an SRO: Remuneration will be a sticking point, and the job expected of IDs will be onerous (given the premium Mint Road now places on governance).
The counterview is that the RBI should have insisted that the strength of IDs on SRO boards be at two-thirds. Why so?
“This would have cut the room for heavyweights among the member entities calling the shots,” says a senior banker.
This comes across as a more stringent version of the Banking Regulation Act, 1949, which states that directors are not to have a substantial interest in, or be connected with any company or firm which carries on any trade, commerce, or industry and which, in either case, is not a small-scale industrial concern.
What is unsaid in all this is the fear that SROs may become captive to vested interests and blur the lines with those of lobby groups.
Now what? With increased interconnectedness in the financial market, there is a case for a regulatory review authority (RRA), which engages the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority.
There are whispers that this is an idea that is ripe for exploration.
All the more so, given the spotlight on SROs. The above is seen as a follow-through to RRA 2.0: it drew from some of the best practices of global central banks — be it on consultation before policy formulation, feedback from REs, structured meetings with banks’ corner room occupants and senior compliance officials, key stakeholders, and trade bodies.
Over 400 circulars were withdrawn. It was the ‘open-door policy’ of the RBI to foster a better engagement of REs with it.
RRA 2.0 was a follow-through on Y V Reddy’s decision as deputy RBI governor to set up its first edition in 1999 (he was later appointed governor in September 2003 and served in that position for five years).
The polestar for Reddy may well have been the 96th Report of the Law Commission of India (1984): “Every legislature is expected to undertake what may be called the periodical spring-cleaning of the corpus of its statute law, in order that dead wood may be removed, and citizens may be spared the inconvenience of taking notice of laws which have ceased to bear any relevance to current conditions.”
Ask Ravi Duvvuru, founder of Duvvuru & Reddy LLP, what he makes of SROs, and he says: “The idea is very good, but it all boils down to execution.”We are in for interesting times.
Multiplicity in SROs
- Issues of coordination
- It could lead to lobbying by SROs
- Fight for onboarding independent directors will be tough
- Financial conglomerates may have entities within it who are part of different SROs
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