Mumbai: India’s first recognised self-regulatory organisation for fintech companies will set up an enforcement committee to investigate malpractices, its chief executive said in an interview. It will also sign bilateral agreements with its members as it seeks to expand its membership base.
“SRO recognition is the highest accolade an association can aspire to receive,” said Sugandh Saxena, CEO of the Fintech Association for Consumer Empowerment or FACE, adding that the recognition was a huge responsibility and will be an ongoing and complex task, given the scale, diversity and speed of change among fintechs.
According to Saxena, if there is clear evidence of repeated and deliberate violations by members, enforcement can take many forms, including removal from membership.
FACE, a Mumbai-based organisation formed in September 2020, currently has over 60 members. It was recognised less than a week ago by banking regulator Reserve Bank of India (RBI). Two other applications for recognition have been filed with the RBI by Mumbai-based Fintech Convergence Council (FCC) and Bengaluru-based Digital Lenders’ Association of India (DLAI).
Protection concerns
The rapid growth of the fintech sector has raised concerns about, among other things, customer protection and data privacy.
Indian Prime Minister Narendra Modi said on August 30 at the Global Fintech Fest in Mumbai that over the last ten years, over $31 billion has been invested in the fintech sector. RBI Governor Shaktikanta Das, speaking at the same event two days before Modi, said the number of fintechs founded in India is around 11,000 and the sector has received investments of around $6 billion in the last two years alone.
Given the complexity of the fintech ecosystem, the RBI wants self-regulators to act as bridges between it and the fintech sector and keep it informed of developments, including by reporting violations.
The RBI itself has recently taken several steps, the most recent being the announcement of stricter peer-to-peer (P2P) lending norms and the penalization of two platforms. On August 21, the RBI imposed a penalty of ₹1.92 crore on NDX P2P Pvt Ltd, also known as LiquiLoans, for non-compliance with certain provisions of P2P and digital lending norms. On the same day, the regulator also imposed 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 recently faced regulatory hurdles, leading to a slowdown.
According to analysts at Emkay Global Financial Services Ltd, rising systemic defaults in the unsecured sector, over-indebtedness and regulatory frictions could hamper growth. “Hence, the regulator has called for the creation of a fintech SRO to regulate players and establish acceptable business practice,” they said in a report dated August 30.
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 types of fintechs in the OAR, which she said has already started to expand membership to fintechs beyond credit. It also plans to roll out dedicated outreach efforts to engage with smaller and newer fintechs, not just established ones.
“It is equally important to put in place strong institutional mechanisms around governance for inclusion and equity. For example, representation of different types of fintechs on the board, committees and task forces, as well as working groups,” Saxena said, adding that to execute the OAR’s mandate, the association will have an enforcement committee to investigate and take action on misconduct.
“Another critical dimension is to strengthen the talent and technology within FACE to take on the responsibility entrusted to us. This is critical to ensure that we are able to collaborate with industry in highly specialized areas like cybersecurity, AI/ML (artificial intelligence/machine learning), privacy, etc.,” Saxena said.
A unique element for the fintech OAR will also be the oversight of all unregulated fintechs that work with regulated entities to ensure that the entire ecosystem operates in a safer and more compliant manner.
“Every regulated entity works with multiple fintechs, LSPs/TSPs (lending service providers/technology service providers), and it is difficult for them to find the right partners they can rely on for compliance, data, technology, etc.,” Saxena said.
Regulate yourself
Recognising the diversity and complexity of the fintech sector, the RBI has been pushing for a fintech SRO to take on part of its oversight and governance role, as well as feedback from industry members so that the regulator can focus on broader policymaking.
At the Global Fintech Fest last week, RBI Deputy Governor T. Rabi Sankar said that self-regulatory bodies in the fintech sector should also work “consciously and consistently” to create conditions that are conducive to competition. He also stressed that self-regulatory bodies should ensure that innovation is not stifled in the name of governance.
“Fintechs must also be attentive to social and macroeconomic interests and priorities, and not subordinate them to commercial interests,” Sankar said.
The RBI had released the fintech framework in May 2024, outlining the functions and responsibilities of an SRO related to standard setting, monitoring and enforcement, among other roles; the structure of the SRO; and expectations of the organisation. The regulator’s decision to choose a customer-centric industry body as the first SRO is also in line with its consumer-centric approach in developing fintech policies.
“Customer protection has been the driving force behind many fintech/digital regulations,” Saxena said, adding that FACE applies a “customer and user interest” lens to everything it does to ensure customers have safe and responsive digital experiences.