The Association of Mutual Funds in India (AMFI), in collaboration with the Securities and Exchange Board of India (SEBI), has significantly enhanced mutual fund penetration. Similarly, the Reserve Bank of India (RBI) is establishing Self-Regulatory Organisations (SROs) for fintech and digital lending to promote industry maturity. These SROs will work with the RBI on policy reform, enforcement, compliance, and disciplinary actions, ensuring that fintech companies adhere to regulations and best practices. Rishi Agrawal, CEO and Cofounder of Teamlease Regtech, sheds more light on how SROs can contribute to making the fintech and digital lending sectors, stable, secure and innovative.
TAM: In what ways can SROs contribute to the maturity and stability of the fintech and digital lending sectors?
Rishi Agrawal: Self-Regulatory Organisations (SROs) have long played an essential role in self-regulation in numerous sectors and industries. They will act as a two-way conduit between the central bank and the two industries and be in charge of creating, putting into effect, and maintaining the standards and practices within their industry. SROs have the authority to develop and enforce a variety of guidelines, recommendations, and behavior standards for their members. Their established policies and procedures play a crucial role in getting rid of unfair, abusive, and illegal practices in the industry. Every member is required to follow the model they develop. In addition, they are in charge of creating a dispute resolution and grievance redressal system for its members and end users. Consequently, SROs will foster confidence and trust in the ecosystem by promoting ethical trade practices and upholding a set standard of conduct among its members.
Consider the Micro Finance Industry Network (MFIN), which has directed its members to share quarterly reports on the interest rate charged, processing fee, Internal Rate of Return (IRR), and Effective interest Rate (EIR) charged to the customer based on location and financial product. Members must also be notified of any modifications in pricing on a quarterly basis. In addition, the SRO has established industry best practices, requiring lenders to provide weekly reports to CICs in the Uniform Credit Reporting Format (UCRF), which is supplied by RBI, with full data. Furthermore, in order to disburse loans, they must use legitimate Credit Information Reports (CIRs). They are also required to conduct quarterly internal audits to check adherence to the SRO directive and report lapses to senior management.
The framework propped up MFIN gives us a glimpse of the possibilities of an SRO-led regulatory ecosystem for the FinTech and Digital Lending sectors. These SROs will contribute heavily to developing industry best practices around data protection and privacy norms. They will also eliminate the instances of mis-selling, fraud, and misconduct with an emphasis on ethical business practices driven by transparency. They are likely to play a key role in creating standardized risk management policies with respect to data protection and cybersecurity frameworks.
DQ: How can SROs help mitigate risks such as fraud and data breaches in the rapidly growing fintech industry?
Rishi Agrawal: As primarily private entities, SROs are much more flexible in their ability to respond to cybersecurity risks and threats. As such, they can establish and enforce industry standards and best practices for data security, fraud prevention, and operational integrity with greater efficiency and speed. They can monitor the compliance status of their members with their own standards and regulatory requirements. This rigorous surveillance allows the SRO to detect and address potential vulnerabilities or non-compliance issues before they escalate into major incidents. They also provide education and training programs on cybersecurity, fraud prevention techniques, and regulatory compliance to member firms.
A key responsibility of an SRO is the continued collaboration between the statutory regulator and the private sector. Such reporting and information-sharing mechanisms aid in the detection of emerging threats, fraud patterns, and areas of vulnerability within the established cybersecurity framework. The standards set by the SRO and the industry to safeguard against the dynamic nature of cyber threats are constantly evolving. The inherent flexibility of SROs enables the industry to adapt to innovations, identify and eliminate fraudulent actors quickly, and take appropriate measures to defend against data breaches.
DQ: How do industry experts view the potential impact of SROs on innovation and regulatory adherence within the fintech space?
Rishi Agrawal: SROs can have a significant impact on the regulatory landscape by establishing clear guidelines and best practices tailored to fintech and the digital lending industry. For instance, creating an adaptive regulatory framework will allow the regulatory ecosystem to evolve alongside technological advancements. As such, enterprises can freely innovate and introduce new solutions and services without having to worry about the absence of regulatory guardrails. This will also enhance regulatory compliance within businesses, as they are proactively involved in the development of the compliance environment.
They will also foster a culture of self-regulation among their member companies, encouraging them to proactively mitigate risks and vulnerabilities. Furthermore, an SRO signifies the trust put in by the Central Bank in the sectors. As such, effective self-regulation will also enhance trust among consumers and investors, ensuring growth and sustainability within the industry.
