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Contributed on September 17, 2020

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NASSCOM’s Feedback on RBI’s Draft framework for recognition of a Self-Regulatory Organisation for Payment System Operators

Blog: NASSCOM Official Blog

Context 

The need to constitute a Self-Regulatory Organisation (SRO) for digital payments covering Payment System Operators (PSOs), including retail products of National Payments Corporation of India (NPCI), was highlighted in Reserve Bank of India (RBI’s) Payment & Settlement Systems in India: Vision 2019-2021 (Vision Document). It emphasized the need for a self-regulatory governance framework to foster best practices on important aspects like security, customer protection, pricing, etc. 

This is not the first time that RBI has suggested creation of an SRO for any sector. In 2014, Microfinance Institution Network (MFIN) became the first industry association to be recognized as a SRO by the RBI based on recommendations of the Malegam Committee, formed by the Central Bank in 2010 to thoroughly examine the issues of the microfinance sector.

In line with its Vision Document, the RBI released the Draft framework for recognition of an SRO for PSOs (draft Framework) for public consultation.

Highlights of our Recommendations 

We welcome the intent articulated by the RBI to establish SRO(s) for PSOs.  

Most regulators around the world operate without SROs. In this context, it might be useful for the RBI to evaluate whether the objectives behind proposing the SRO model could possibly be addressed with a “No SRO” approach? To illustrate, could the regulatory framework be further simplified through (i) a sharper risk based regulatory framework (say, where entities who are not directly in custody of consumer funds are required to demonstrate strong consumer redress mechanisms and publish quality of service indicators), (ii) enabling an increase in competition by enabling greater participation in different payment market segments (leading to greater focus on improving consumer experience). One benefit of keeping a “No SRO” approach in perspective may be an overall reduction in regulatory burden in a gradual manner, even as the industry expands. 

Assuming that an SRO is indeed necessary, at-least for a foreseeable future, the key value proposition that can be realised from the SRO should be well defined. Its differentiation from an Industry association/ council or the regulator should be sharply designed. 

For example, an SRO has to look beyond the immediate interest of its members and focus on the larger interest of the end consumers and the development of a thriving market. This is also the hall mark of an effective industry association or council. An industry association/ council can also set standards and best practices and enforce its rules amongst its members. 

However, what places an SRO in a unique position is the recognition granted by the concerned regulator upon: 

• standards/ benchmarks recommended by the SRO,  
• training and certifications conducted by the SRO, 
• the role of the SRO in helping develop market ecosystem,  
• involvement of the SRO in discussions and decisions related to the industry, and 
• settlement of disputes between members by the SRO 

As is evident, the above are mainly market development functions. An SRO’s ability to discharge these functions effectively is relatively strong and it might be useful for the regulator to delegate these market development functions to the SRO subject to an appropriate oversight mechanism. 

In contrast, there are other functions that are purely regulatory in nature, such as prescribing mandatory standards/ rules, and the enforcement of such rules through investigations and penal actions. An SRO’s are typically ill-equipped to discharge these functions effectively (as explained further in the clause-by-clause feedback below), and such pure regulatory functions should continue to vest in the appropriate regulator. 

While we do not have empirical evidence to support the above view, an inherent conflict is borne out when the same SRO is expected to both represent its members’ interests, and to police them through punitive actions. If the SRO’s powers of punitive/penal actions are stiff (or even commensurate with the offence) then there is a risk that they may not be exercised as needed. At the same time, if the SRO’s ambit of punitive/penal actions are relatively lenient then they may probably serve no purpose.  

In certain instances, where SROs also operate a market infrastructure like an exchange, the delegation of certain enforcement powers to them with adequate regulatory oversight can be effective. However, in these situations, there remain other conflicts including those around competition that can become problematic. This has led to the SRO model losing favour in case of ‘exchanges’  SROs and globally there is an increased role of regulators to conduct securities regulation. 

In situations where the SRO is not operating a market infrastructure, obligations around investigation and penal actions should be considered very carefully and are best avoided.  

The extent of SRO’s involvement in regulatory functions as against market development function is often the source of key concerns with the SRO model and this extends beyond the issue of conflict of interest discussed above. It often leads to industry capture. This contributes to consumer and market dissatisfaction. Given that SROs are often an additional layer of regulation, it adds to costs for the industry and in case there are overlaps between the regulator and the SRO, it contributes to increased inefficiency which in turn calls for greater efforts for coordination as against actual regulation.  

Therefore, the proposed SRO may be primarily relied upon by the RBI to strengthen market development, rule–making and the overall compliances by the industry. The RBI may consider strengthening the proposed framework keeping this in perspective. Further, in the framework: 

• An SRO’s role as an advisor to RBI on payment related matters should be explicitly provided.  
• RBI should clarify the consequences of an industry player not becoming a member of an SRO, or a non-member taking a position contrary to the SRO. Similarly, what would be consequences of a suspension or termination of a membership by an SRO?  
• RBI should provide clear guidelines on the eligibility requirements and evaluation criteria to be adopted to recognise an SRO.

Please find our detailed (clause by clause) feedback attached with this blog. Please write to komal@nasscom.in for any further clarification.

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