The structure of regulation of the financial sector has been largely static over decades. RBI is now ushering in a substantial change. How?
It has introduced a new framework for Self-Regulatory Organizations (SROs) for its regulated entities (REs). This big step aims to improve industry standards and compliance within the financial sector through self-regulation. It will complement existing regulations set by the RBI.
RBI wants SROs to operate under its oversight and function with credibility, objectivity, and responsibility. They will have the authority to set ethical and professional standards for their members, and them through counselling, cautioning, expulsion, and similar mechanisms.
SROs will develop and implement best practices and codes of conduct for their members, establish clear disciplinary processes to address any violations, and foster innovation, while maintaining high standards of compliance.
Culture, Collective Voice
SROs are expected to promote a culture of compliance among their members, with a particular focus on supporting smaller entities. They will also act as a collective voice for the industry in its engagements with the RBI and other regulators. They will collect and share relevant industry information with the RBI to inform policymaking and the development of new financial products. They are also expected to promote R&D within the sector.
Responsibilities Towards Members
SROs’ primary responsibility will be to promote best practices among their members, such as establishing minimum benchmarks for professional conduct and protecting the interests of customers, depositors, and other stakeholders. They will achieve this by developing codes of conduct for members and monitoring adherence. They will also establish a grievance redressal mechanism and offer dispute resolution services. Furthermore, SROs will also educate their members about regulatory requirements and provide resources for knowledge sharing and skill development. Finally, they are tasked with educating the public about the operations of REs and available grievance redressal mechanisms.
Eligibility Criteria, Governance
To be eligible for recognition as an SRO, the applicant entity must be a not-for-profit company with a diversified shareholding structure. They must also represent the sector with a specified minimum membership or a roadmap for achieving it within a reasonable timeframe. The applicant and its directors must possess professional competence, integrity, and a clean legal record.
SROs are expected to operate with transparency and independence. They will have a professional management structure with clear provisions in their bylaws to address conflicts of interest. The board of directors will be comprised of individuals with relevant experience and integrity, with at least one-third being independent from the regulated entities the SRO represents. The board will ensure the SRO has adequate human resources and technical capabilities to effectively monitor the sector.
Application, Recognition
The process for obtaining recognition as an SRO is rigorous. Applicants must submit a detailed application outlining their constitution, board composition, management structure, and roadmap for achieving minimum membership criteria. The RBI reserves the right to request additional information and may reject incomplete applications. Following a successful application, the RBI will issue a ‘Letter of Recognition’ to the SRO. The recognition is subject to certain conditions, including adherence to membership requirements and periodic review by the RBI. The RBI also retains the right to revoke recognition if the SRO’s functioning is deemed detrimental or non-compliant with its objectives.
Responsibilities Towards the Regulator
SROs are expected to collaborate with the RBI to achieve better compliance, promote sectoral development, protect stakeholder interests, and foster innovation. They will keep the RBI informed about industry developments and any regulatory breaches by their members. SROs will also undertake any work assigned by the RBI and provide data and information as requested. They will submit annual reports and engage in periodic interactions with the RBI. In sum, they will be a big support to enable RBI to regulate effectively.
Membership Criteria
SRO membership will be voluntary, and the RBI will set specific membership criteria for each category of REs. The SRO must achieve the minimum membership requirement within a specified timeframe, typically within 2 years from receiving recognition. Failure to do so may result in revocation of recognition.
This framework for SROs is a significant step towards promoting self-regulation within India’s financial sector. By fostering industry-led initiatives for better governance, compliance, and innovation, SROs can contribute to a more robust and efficient financial system.
Bottomline, RBI is now definitely thinking out of the box to shape the future of regulation mechanism.
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