Armed with RBI sanction, first fintech self regulator to ramp up enforcement

Mumbai: India’s first recognised self-regulatory organisation or SRO for fintech companies will set up an enforcement committee to investigate misconduct, its top executive said in an interview. It will also sign bilateral agreements with members while aiming to broaden its membership base.

“SRO recognition is the highest reward an association aspires to receive,” said Sugandh Saxena, chief executive of Fintech Association for Consumer Empowerment or FACE, adding that recognition was a huge responsibility and will be a continuous and complex task, given the scale, diversity, and speed of change amongst fintechs.

According to Saxena, if there is clear evidence of repeated and deliberate violation by members, enforcement can take many forms, including removal of membership.

FACE, a Mumbai-based organisation that was set up in September 2020, has more than 60 members currently. It was recognised less than a week ago by banking regulator Reserve Bank of India (RBI). Two other applications for recognition are with the RBI, from Mumbai-based Fintech Convergence Council (FCC) and Bengaluru-based Digital Lenders’ Association of India (DLAI).

Concerns over protection

The staggering growth of the fintech sector has led to concerns around customer protection and data privacy, among other things.

Prime Minister Narendra Modi said on 30 August at the Global Fintech Fest in Mumbai that in the past 10 years, more than $31 billion has been invested in the fintech space. RBI governor Shaktikanta Das, speaking at the same event two days before Modi, said the number of fintechs founded in India was approximately 11,000, and the sector received investments of about $6 billion in the past two years alone.

Considering the spread the complexity of the fintech ecosystem, RBI wants self-regulators to act as bridges between it and the fintech industry, and keep it updated on developments, including pointing out violations.

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RBI itself has taken several measures recently, with the most recent being announcing stricter peer-to-peer (P2P) lending norms and penalising two platforms. On 21 August, RBI imposed a penalty of ₹1.92 crore on NDX P2P Pvt Ltd, also referred to as LiquiLoans, for non-compliance with some provisions of the P2P and digital lending norms. On the same day, the regulator also slapped a fine of ₹1.99 crore on Innofin Solutions Pvt Ltd, also known as LenDen Club, for the same reasons.

Experts said that while the digital lending opportunity is huge, it has of late faced regulatory hurdles, leading to slowdown.

According to analysts at Emkay Global Financial Services Ltd, rising systemic delinquencies in the unsecured space, over-leveraging and regulatory friction could stifle growth. “Thus, the regulator has called for creating a fintech SRO to regulate players and set an acceptable business practice,” they said in a report on 30 August.

The FACE of fintechs

Saxena said FACE had presented a roadmap to the regulator, detailing its plans once it is recognised as a self-regulator. The first task would be to involve all kinds of fintechs in the SRO, which she said has already started expanding membership to fintechs beyond credit. It also plans to have dedicated outreach efforts to engage with smaller and newer fintechs, and not just the established ones.

“Equally important is building solid institutional mechanisms around governance for inclusivity and fairness. For example, representation of different types of fintechs on the board, committees and working groups, and task forces,” said Saxena, adding that to execute the SRO mandate, the association will have an enforcement committee to investigate misconduct and take action.

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“Another critical dimension is stepping up talent and technology within FACE to undertake the responsibility given to us. This is critical to ensuring that we are able to collaborate with the industry on highly specialized areas of cyber security, AI/ML (artificial intelligence/machine learning), privacy, and so on,” Saxena said.

A unique element for the fintech SRO will also be oversight of all unregulated fintechs that work with regulated entities to ensure that the entire ecosystem functions in a more secure and compliant manner.

“Every regulated entity works with multiple fintechs, LSPs/TSPs (lending service providers/technology service providers), and it is hard for them to discover the right partners who they can rely on for compliance, data, technology etc,” said Saxena.

Regulate yourself

Acknowledging the diversity and complexity of the fintech sector, RBI has been pushing for a fintech SRO to take on some of its oversight and governance role, and feedback from industry members so that the regulator can focus on broader policy setting.

At the Global Fintech Fest last week, RBI deputy governor T. Rabi Sankar said that fintech SROs should also work “consciously and consistently” to create conditions that are favourable to competition. He also pointed out that SROs should ensure that innovation is not stifled in the name of governance.

“Fintechs also need to be alert to social and macroeconomic interests and priorities, and not subsume them to business interests,” said Sankar.

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RBI had released the framework for fintechs in May 2024, outlining the functions and responsibilities of an SRO related to standards setting, oversight and enforcement, among other roles; the construct for the SRO; and expectations from the organisation. The regulator’s decision to pick a customer-centric industry body as the first SRO is also in line with its consumer-focused approach on fintech policy making.

“Customer protection has been the driver of many fintech/digital regulations,” Saxena said, adding that FACE applies the ‘customer and user interest’ lens to all that it does to ensure that customers have safe and suitable digital experiences.