Regulatory Bodies and Regulatory Approaches for Fintech Companies in India: Best Corporate Lawyer Advice in Delhi NCR
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With new technology comes the responsibility of regulating the services offered by the industry. For FinTech companies, there are regulations issued by the Reserve Bank of India (RBI) but it’s not the only regulatory body, and approaches towards FinTech companies are also different. In this article, regulatory bodies governing the FinTech industry in India and the regulatory approaches pertaining to FinTech companies are discussed.
Regulatory Bodies for FinTech Companies in India
The major bodies governing the regulatory aspects of the FinTech industry are RBI, the National Payment Corporations of India (NCPI) and Unique Identification Authority of India (UIDAI). These are elaborated below-
Reserve Bank of India- FinTech companies are primarily regulated by the Reserve Bank of India (RBI). It supervises and monitors the FinTech industry and can make schemes, and issues circular, or regulations as deemed appropriate for FinTech industry. It is given under section 18 of the Payment and Settlement System Act, 2007 (P&SS Act). RBI has been making amendments and several new regulations to accommodate the developments in the FinTech industry.
National Payment Corporations of India (NCPI)- It is a quasi-regulatory authority that regulates, monitors, and supervises the retail payments and settlement system in India. The guidelines issued by NCPI namely, Periodic Procedural Guidelines govern the UPI Payments in India.
Unique Identification Authority of India (UIDAI)- The Aadhar Program is administered by this statutory body. It is the largest identity project ins India. Aadhar is used by FinTech companies for verification of customers and UIDAI governs all the central rules and regulations of Aadhar.
Regulatory Approaches for FinTech Companies in India
Data Protection Regulations- India substantially has not been influenced by international or global regulatory regimes for example resistance to recognition of cryptocurrency by India but there is one international precedent relied on by India, i.e., Data Protection by FinTech companies. India in its regulatory regime is very strict about Data Protection Compliances and made it mandatory to be followed by FinTech Companies. Cybersecurity, and data protection is essential to be ensured by these companies or start-ups and must comply with the Information and Technology Act, 2000 (IT Act).
Regulatory Sandboxes (RS)- RBI deals with innovations, technology, products by inviting comments from the general public, experts, players, stakeholders of that field. In the case of FinTech space, whenever a new technology comes, the RBI does the same. RBI issued Enabling Framework for Regulatory Sandbox in 2019 and before that in 2009 also. Regulatory Sandbox means to live testing in a controlled or test regulatory environment of new products. It permits conducting field tests to collect evidence on the advantages and disadvantages of new financial innovations as well as carefully monitoring and containing their risks. As per the RS Framework, the entities that are qualified to participate to test their products are FinTech companies including start-ups, banks, and financial institutions. Companies partnering with or providing support to FinTech are also eligible. The eligibility criteria for these entities-
– Having a minimum net worth of rupees 1 million
– Satisfactory credit score of promoters and directors of the entities
– Applicant entity’s promoters and directors satisfying the ‘fit and proper’ criteria
– Indicated compliance with Data Protection Laws
– Adequate IT infrastructure
If the above following criteria are satisfied by the entity, then it will be able to go for RS Test. There are also criteria set for what types of products can be tested and expected results to be clearly stated upfront. The applicant entity has to submit the result on an ongoing basis and RBI has made it very clear to follow KYC requirements and Data Protection Laws.
This is a medium to encourage innovations that intend to use in the Indian market. The RS Framework provides an indicative list of innovative products, and services.
General Approach- Regulatory requirements or Compliances for the FinTech company can be classified as activity-based and entity-based. Activity-based means institutions offering a given service for example- credit underwriting, payment services, or investment intermediation, investment advice. Entity-based consist of requirements to be satisfied by entities holding a license that allows them to undertake a particular activity or combination of activities.
Banks are subjected to prudential obligations for example- requirements for minimum capital and liquidity, maintaining the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Banks are also subjected to additional regulations such as consumer protection, anti-money laundering (AML)/combating the financing of terrorism (CFT), or conduct of business, applicable to different services provided by the banks like debit cards, smart cards & payment services.
Non-Banking Financial Institutions (NBFCs) offering financial services (payments, credit, crowdfunding, wealth management, investment advice, etc) need a license based on the activity they perform or the service they provide. These are also subject to regulatory requirements in the areas of consumer protection and AML/CFT. For example- FinTech that provides banking and other financial services must obtain the license- ‘Differentiated banking license’ scheme to issue ‘on-tap’ licenses and comply with outlined regulations.
Conclusion
The primary regulatory body RBI is making changes and new rules and regulations to accommodate the innovation and developments in the FinTech sector and it can be seen in the regulatory approach too towards the FinTech industry.
Authored By: Adv. Anant Sharma & Anjali Swami
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