RBI Releases Guidelines for Financial Market Self-Regulation

RBI Releases Guidelines for Financial Market Self-Regulation

The RBI released its Framework for Recognition of Self-Regulatory Organisations (SROs) in Financial Markets and invited applications on August 19, 2024. It is based on the ‘Omnibus Framework for Recognition of Self-Regulatory Organisations for Regulated Entities of the Reserve Bank’ issued on March 21, 2024. In recent years, the RBI pushed for SROs in various sectors of the financial landscape including fintech and NBFCs. It also stated that it wished to create more frameworks for different SROs in its Annual report for 2023-24.

CAMSfinserv CEO Tejinder Singh told Medianama in an interview that the RBI may also include technology service providers (TSP), the intermediation layer between Account Aggregators and Financial Information Users (banks and lending agencies) in SROs as they are fintech entities.

This framework aims to encourage players engaged in financial markets for interest rates, Government securities, securities and corporate bonds, foreign exchange markets, etc to self-regulate and operate with credibility, objectivity and responsibility under the oversight of the regulator.

The RBI stated that an SRO can maintain integrity, ensure professionalism, promote ethical conduct and improve regulatory compliance for the healthy and sustainable development of the financial markets.

CHARACTERISTICS OF AN SRO

Strong governance mechanisms

An SRO must have an independent Board, be transparent, and adhere to well-defined processes. It should also derive authority from membership agreements or Articles of Association and set and enforce ethical and professional governance standards.

Well-defined consultative processes

Processes can help frame rules on member conduct and activity oversight. An SRO should establish clear standards of conduct and specify consequences such as counselling, cautioning, reprimanding and expelling members, for violation of agreed rules/codes. However, it must not impose monetary fines on members for these violations

Independent operations

The SRO must be impartial to all its members. A single or group of members must not influence an SRO decision.

Strong compliance standards

SROs must develop a culture of compliance with the RBI’s regulations among its members.

Effective monitoring

It must monitor and be aware of all the new developments in the financial markets.

Best practices

It must ensure that members follow standards / best practices according to regulations. The RBI also said that the SRO’s standards / best practices should not be a substitute for any applicable statute, or regulatory circulars, directions, guidelines, rules and regulations.

OBJECTIVES AND RESPONSIBILITIES OF THE SRO

An SRO must have a set of overarching objectives for the betterment of the sector. This includes a strong emphasis on the development and adherence to robust self-regulatory principles, practices and conventions that are conducive to the furtherance of the financial market. The objectives of an SRO are to :

Promote a culture of compliance

SROs must frame a comprehensive code of conduct for its members. It must then ensure progressive practices and conventions and extend guidance on compliance to smaller entities

Collectively represent members

The SRO must represent and address broader industry concerns to the Reserve Bank, government authorities and other statutory and regulatory bodies. It must not function in self-interest and ensure equitable and transparent treatment for all its members.

Examine international standards 

It must identify opportunities to enhance the functioning of Indian financial markets by observing and monitoring best practices set by international standard-setting bodies and market practices in other jurisdictions.

Share information for policy-making

An SRO should share its input with the RBI to aid in policymaking.

Foster innovation

It can facilitate the introduction of new products within the regulatory framework set by the Reserve Bank.

Promote research

An SRO must encourage innovation while ensuring the highest standards of compliance and self-governance.

Promote best practices

It should ensure transparency and fair pricing for the retail and smaller participants while accessing financial markets.

Responsibilities of the SRO towards members

For the benefit of its members, an SRO must establish minimum benchmarks and conventions for professional market conduct. It must also aim to safeguard the interests of all stakeholders in the ecosystem. An SRO is expected to:

Frame a code of conduct 

It must monitor its members’ adherence to the code as well as compliance with the regulatory instructions

Develop a reasonable and non-discriminatory membership fee structure

An SRO’s membership fees can vary based on the size, intent, capability, etc. of members. However, all members, irrespective of membership fees must enjoy equal rights and representation.

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Avoid conflict of interest 

SROs must always act in good faith and avoid any conflict of interest.

Disseminate sector-specific information

The SRO must spread awareness and inform members of sector-specific information through periodicals, bulletins, pamphlets, magazines, etc.

Establish a grievance redressal mechanism

Members should be able to address their grievances through an established dispute resolution/arbitration framework. The dispute resolution process should consistently use efficient, fair and transparent policies and procedures that are in line with the regulatory and statutory requirements. SROs must also offer counselling on practices that may be detrimental to the growth of the financial markets/system.

Proliferate regulatory knowledge

Members must have knowledge of statutory and regulatory provisions and resources for the exchange of expertise among themselves. SROs can also arrange training programmes for skill development and awareness programs on contemporary issues for their members.

Educate public 

SROs must spread awareness among the public and educate them on their members’ operations and the various grievance redressal mechanisms available to them.

RESPONSIBILITIES OF THE SRO TOWARDS THE REGULATOR

The SRO is expected to be an ally of the Reserve Bank and a bridge to various members in the sector. Thus, it is expected to :

Inform the RBI on developments.

An SRO must inform the RBI about sector-specific developments. It must also inform the RBI of any act of misconduct or violation by its members and provide data/information sought by the Reserve Bank periodically or as advised.

Submit an Annual Report

It must submit a report within six months of completion of the financial year and returns as prescribed by the RBI.

Engage in periodic interactions

An SRO must offer its views and suggestions to the RBI based on a larger picture of the industry.

Provide stakeholder feedback 

It must provide comprehensive stakeholder feedback on consultations, draft circulars, etc., shared by the Reserve Bank, in a timely manner.

SROs must follow the RBI’s directions, from time to time. The RBI can also inspect an SRO’s books or arrange to have an independent inspection, and the SRO must oblige and provide the required information and shoukder the cost of the process.

ELIGIBILITY CRITERIA, GOVERNANCE, AND APPLICATION FOR RECOGNITION

An SRO must:

a) Be a not-for-profit company registered under Section 8 of the Companies Act, 2013

b)Have a minimum net- worth of Rs 10 crore 

c)Possess or have the ability to create infrastructure to enable it to discharge the responsibilities of an SRO 

d) Have a good mix of members across different types and sizes of entities that adequately represent the sector/market.

  • No entity must hold 10 % or more of its paid-up share capital, either singly or acting in concert.
  • Membership of an SRO is voluntary.
  • An SRO must create a roadmap, not exceeding two years, to achieve adequate representation, if it is lacking in certain sections. Failure to achieve diversity could result in rejection or revocation.
  • Directors must demonstrate professional competence
  • Directors must have a general reputation for fairness and integrity
  • Neither the applicant nor any of its Directors should have been convicted of any offence including moral turpitude / economic offence in the past or be involved in any adversely impactful legal proceedings

If necessary, the Reserve Bank may prescribe certain conditions to ensure that the functioning of the SRO is not prejudicial to the public interest while granting it recognition.

GOVERNANCE FRAMEWORK OF THE SRO

  • An SRO must be professionally managed, and its Articles of Association/bylaws must reflect this. The bylaws must also set out the functioning of the Board of Directors / governing body and address issues such as conflict of interest.
  • The Articles of Association of Association/bylaws of the SRO must specify the functions of an SRO. It must clearly lay down the criteria for admission, expulsion, suspension, re-admission, etc. of members.
  • The SRO must ensure that it does not undertake any activity that can compromise or pose any conflict of interest with its activities/roles as an SRO.
  • The Board of the SRO or the Reserve Bank may frame the proper criteria for the SRO’s Director. They must have relevant expertise/experience along with high integrity. At least one-third of the members of the Board must be an Independent Director and without any active association with the category/class of entities for which the SRO is established. The Board must also frame a policy on the rotation of Directors for important positions in the Board and report these or any other changes to the RBI. The Board should also ensure that the Key Managerial Personnel of the SRO are professionally competent and have a reputation for fairness and integrity.
  • The Board should ensure that the SRO has adequately skilled human resources and robust technical capability to monitor the sector. It must follow transparent practices for establishing its governance processes.
  • The SRO must comply with the provisions of relevant Acts, circulars, directions, guidelines, rules and regulations issued by the Reserve Bank from time to time.

Application for recognition

If an SRO fits the criteria as prescribed, it can make an application and have it authorized by its Board for recognition. It will require:

  1. A copy of the Memorandum of Association relating to the constitution of the SRO;
  2. A copy of the Articles of Association / bye-laws of SRO
  3. Details of the constitution of the Board and the Directors, roles/responsibilities of management and the manner in which its operations would be undertaken;
  4. The details of Key Managerial Personnel of SRO and their powers and duties;
  5. Roadmap to achieve the adequate representation of the sector/market within the prescribed timeline, if applicable
  6. Details of activities, other than activities pertaining to the SRO, that the applicant undertakes/seeks to undertake, if any
  7. A declaration that any members of the Board or any Key Managerial Personnel have not been convicted of any offence, including moral turpitude / economic offence, in the past.

The information must be true and not misleading. The SRO must follow the requirements in this Framework and any other condition the Reserve Bank prescribes. The RBI may conduct a periodic review of an SRO and may revoke its recognition of the SRO if it deems that the SRO’s functioning is detrimental to the public interest or if the SRO conducts activities that do not confirm its stated objectives. However, the RBI will give it an opportunity of a hearing.

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