Last week, the Reserve Bank of India introduced a preliminary framework for Self-Regulatory Organisations, designed to oversee banks, non-banking financial companies, and other entities under its regulatory scope. The draft outlines broad objectives, functions, eligibility criteria, and governance standards for SROs, serving as a general guideline for entities across various sectors. It also details membership criteria and conditions SROs must meet to gain recognition from the regulator.
The RBI proposes that SROs can be established by regulated entities. Additionally, the RBI plans to audit the books of other entities. The draft is open for public comments until January 25, 2024. To be licensed as an SRO, applicants must form a not-for-profit company with adequate net worth and infrastructure capabilities. They should represent their sector and either hold specified memberships or present a plan to acquire these within a reasonable timeframe.
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The need for SROs in banking
Globally, SROs independently create and enforce sector-specific regulations and standards. India already has several SROs in different segments, including banking. A banking sector SRO would establish ethical, professional, and governance standards. These organisations, operating semi-independently from government regulators, can implement amendments more swiftly, reducing bureaucracy.
The banking sector SRO’s main roles would include providing sectoral information to the RBI for policymaking and promoting best business practices among its members. It should set minimum professional conduct standards.
While SROs offer promising benefits in terms of swift implementation and sector-specific expertise, some concerns require careful consideration. One concern is the potential for bias towards the interests of larger entities within the industry, neglecting the needs of smaller players. Another potential issue is the lack of complete independence from the RBI, which could compromise the effectiveness of self-regulation. Striking a balance between industry participation and regulatory oversight will be crucial for SROs to succeed in India’s diverse financial landscape.
SRO members are typically industry veterans knowledgeable about sector challenges. For banks, SROs could focus on customer protection, risk management, anti-money laundering, and market conduct. Current norms require that at least one-third of an SRO’s board, including the chairperson, be independent and unaffiliated with the regulated entities.
The RBI may inspect an SRO’s books or appoint an audit firm for this purpose. The SRO must cooperate with the inspection team and bear the inspection costs. SROs must also maintain strong governance, focusing on an independent board, transparency, and adherence to processes. They are encouraged to particularly support smaller sector entities and share practices in line with statutory and regulatory policies.
RBI Governor Shaktikanta Das had advised fintech firms to form an SRO to address issues like market integrity, data privacy, and cybersecurity. An example of a functioning SRO is the Foreign Exchange Dealers Association of India (FEDAI), which supports banks in forex markets and liaises with the RBI.
Additionally, the Google Play Store recently allowed real-money games approved by SROs under new online gaming regulations in India. These rules, part of an IT Rules amendment, promote industry self-regulation.
SROs are tasked with establishing grievance redress and dispute resolution frameworks for members, and curbing harmful practices that hinder sector growth. They must also submit an annual report to the RBI within three months of the accounting year’s end.
Many developed nations, including the UK, the US, and EU member states, have established SROs. In the UK, the Financial Conduct Authority (FCA) collaborates with SROs like the London Stock Exchange (LSE). In the EU, countries such as Germany and France have their own SROs, like BaFin and the Autorité de Contrôle Prudentiel et de Résolution (ACPR), respectively.
The RBI’s draft framework marks a significant step towards embracing SROs as a potential regulatory tool in India. However, the success of this initiative will depend on several factors. Clear guidelines for monitoring and enforcing SRO standards, coupled with robust grievance redressal mechanisms, will be essential.
Additionally, fostering active participation from smaller financial institutions and ensuring transparency in SRO operations will be crucial to build trust and confidence in the system. As India’s financial sector continues to evolve, SROs have the potential to play a vital role in achieving regulatory efficiency and promoting ethical conduct within the industry.