Fintech Governance in Focus: Unraveling the Dynamics of Self-Regulatory Organizations and Regulatory Frameworks
Professor Howell”s research, as presented in the Harvard DASH repository, outlines the sequential stages of the regulation process, involving rulemaking, enactment, monitoring, and enforcement. SROs, leveraging their domain expertise and proximity to markets and consumers, are anticipated to actively participate in rulemaking, offering valuable insights to regulators. However, vigilance is essential to ensure that such contributions are aligned with broader public interests rather than being self-serving.
Enforcement of rules and the imposition of penalties for breaches present a challenge for SROs, particularly considering that many fintechs are not licensed by the RBI. Moral suasion and cooperative efforts with the RBI in shaping monitoring and enforcement frameworks may be instrumental in controlling malfeasance within the sector.
Several issues must be addressed to guarantee the success of SROs. Firstly, with over 3,000 government-recognized fintechs (not licensed by the RBI), there is a need for comprehensive mapping based on customer and market impact metrics. Secondly, the diverse business and operating models of fintechs necessitate careful consideration, especially concerning fair competition. The regulator must determine whether ensuring a level playing field is the responsibility of the regulator or the market itself.
Additionally, the appropriateness of applying activity-based and/or entity-based regulation requires clarification. A nuanced approach that blends both types of regulation might be necessary in various contexts. For example, operational resilience may benefit from a combination of entity- and activity-based regulations. Furthermore, coordination among multiple SROs may be crucial in addressing systemic issues arising from the sale of third-party products by banks.
Collaboration between traditional full-service banks and fintechs under a single SRO could potentially create a win-win situation, fostering ecosystem improvement. However, the challenge lies in unifying heterogeneous players under a homogenous roof, necessitating alignment between SROs and the RBI to minimize friction.
SROs are expected to play a pivotal role in shaping best practices and frameworks for the implementation of the newly enacted Digital Personal Data Protection Act, particularly in an era where data misuse is no longer tolerated. The success of SROs should be measured by their ability to maximize positive outcomes such as social welfare and public good objectives.
While SROs are poised to significantly contribute to the regulatory landscape, it is essential to acknowledge that the ultimate responsibility rests with the public regulator. Timely regulatory intervention can be instrumental in resolving tensions that may arise among various stakeholders in the rapidly evolving landscape of technological innovations and high-stakes financial activities.
