RBI may be learning to trust SROs

It is a truism that regulation often trails the market. This is partly because the distance from the market means that regulators may be disconnected from what is happening in the market. While regulators are expected to be in touch with their constituents and foster growth and innovation while firmly protecting consumer interests, this is easier said than done. There always is a gap between regulators and the market that leaves one unhappy with what the other is doing. A way to bridge this and promote a meeting of minds is to have a trusted intermediary that can advocate for the market’s interests but at the same time moderate the market’s expectations. Regulators could consider the middleman an accurate communicator of market expectations.

In its quest to balance regulatory drive and market expectations, the October 2023 statement on developmental and regulatory policies from the Reserve Bank of India (RBI) recognised that self-regulatory organisations (SRO) strengthen “compliance culture” and provide a “consultative platform for policy making”. The statement also promised that the RBI would issue an “omnibus framework” to recognise SROs for various regulated entities (RE). It would set out common elements for all SROs. These would include broad objectives, functions, eligibility criteria and governance standards. Sector-specific conditions would be prescribed when inviting applications. A draft would be released for public comment.

A discussion paper on recognising SROs for REs and inviting public responses was subsequently issued by the RBI on 21 December 2023. The paper’s introduction recognised that self-regulation can complement statutory regulation. SROs can contribute to “innovation, transparency, fair competition, and consumer protection” and “also aid in framing/fine-tuning regulatory policies by providing inputs on technical and practical aspects, nuances and trade-offs involved”. This was a conciliatory statement from a regulator previously regarded as excessively detail oriented.

The discussion paper laid out the characteristics of an SRO. It should have sufficient authority from its members, should have in place a consultative process for the conduct of its members and should be able to enforce its rules. An SRO should have strong governance mechanisms and should put in place procedures for overseeing the activities of its members. An SRO should have “suitable surveillance methods for effective monitoring of the sector”. The discussion paper also prescribed the duties of the SRO regarding the regulator, the eligibility of an applicant to establish such an organisation and its governance framework.

The discussion paper declared that at a general level, SROs were expected to follow and enable overarching objectives for the betterment of the sector they represent, to address critical industry concerns and to foster advancement. SROs were expected to promote a culture of compliance and to act as a collective voice for their members in engaging with the RBI and other governmental and regulatory bodies. An SRO must ensure equitable and transparent treatment of all its members, and address broader industry concerns. SROs should also encourage research and development to embrace innovation.

The move to recognise SROs appears to have been welcomed, particularly by the fintech sector, which has previously complained of not having enough of a voice with the RBI. It is thought that the RBI has had a good relationship with SROs in the microfinance sector, considered to be good advocates for the industry. They have also been thought to have provided the RBI with sufficient sector information that led to more flexible regulations.

The discussion paper appears to deal with broad principles; this is a good approach as the RBI tends to be overly prescriptive. The paper is silent on the treatment of existing representative organisations in the financial sector. Would they have to apply for recognition or would they qualify automatically? This prompts another question that if SROs have in any event to be autonomous and representative, is there even a need for them to be recognised by the regulator. Perhaps this is not so much about recognition for the purpose of being licensed as it is about preventing undue lobbying. If so, this is a perspicacious feature of the draft regulations.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal.