Banking Frontiers

Regulation - Reshaping the Mechanism

- Manoj@bankingfro­

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 counseling, 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.


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.


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.


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.


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.


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 selfregula­tion 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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