Digital payments: Taking the right self-regulatory organisation route

By Shehnaz Ahmed

RBI recently announced its decision to put up a framework for setting up a self-regulatory organisation (SRO) for digital payments in India, with a view to foster best practices on security, customer protection, pricing, etc. The proposed framework is in line with RBI’s Payment & Settlement Systems in India: Vision 2019-2021. The SRO model is not novel to India. RBI itself issued a framework to accord recognition to SROs for NBFC-microfinance institutions that meet certain minimum requirements, such as having independent directors, board members that meet RBI’s fit-and-proper criteria and a code of conduct recognised by RBI. Similarly, SEBI issued specific regulations, pursuant to which SROs require recognition from SEBI. Notably, SEBI retains substantial oversight over SRO and its members. For instance, SEBI may prescribe conditions relating to qualifications for membership to an SRO, representation of SEBI directors in the board of an SRO, etc.

Globally, the concept of such industry associations is not uncommon in the payments landscape. For instance, in Singapore, the Monetary Authority of Singapore (MAS) has set up the Singapore Payments Council (SPC). It is headed by the MAS chairperson and comprises of leaders from banks, payment service providers, businesses and trade associations. It seeks to promote interoperability among e-payments solutions, develop strategies to drive adoption of e-payments and make recommendations on payments-related policies. Unlike the MAS that exercises substantial oversight over this body, the Australian payments regulatory framework operates on a ‘co-regulation’ model and leans heavily in favour of self-regulation, with the Reserve Bank of Australia (RBA) intervening only in cases where the industry is unable to address public interest. This leaves ample scope for industry bodies such as the Australian Payments Network (AusPayNet) to develop their own standards and practices governing payments, clearing and settlement. Unlike the SPC, AusPayNet just has a representative from RBA on its board.

Despite the variance in the nature and mandate of these organisations, they have been instrumental in promoting innovation in the digital payments sector. In Singapore, the SPC played an active role in developing common QR code specifications for e-payments. In Australia, the industry under the auspices of the AusPayNet formed the Real-Time Payments Committee, which finalised an industry proposal to deliver a fast payments solution for Australia that formed the basis of the New Payments Platform.

Undoubtedly, SROs can play a role in supplementing the work of regulators. They have the necessary technical expertise to better understand issues facing the industry, and this may lead to more practicable standards. Such an approach may lead to better compliance as there is greater industry buy-in for regulations informed by industry expertise.

However, common concerns associated with SROs are the possibility of undue influence of the industry on regulatory policies and the potential conflict of interest that could arise between their regulatory responsibilities and business operations. To deal with these, there is merit in designing a framework that subjects an SRO to some form of regulatory oversight. Such a framework must ensure appropriate level of accountability for an SRO without usurping its ability to respond quickly to changing market conditions. Thus, a key issue RBI must consider is the ownership and governance structure of SROs, since it determines the basis of the major decisions of an SRO. This is also relevant to ensure there is a degree of independence from the regulator and regulated entities. The framework must envisage adequate structures, policies and procedures to ensure there is separation between regulatory and commercial operations of an SRO.

The setting up of an SRO for digital payments may be viewed as a positive signal to the market regarding the willingness of the regulator to work with the industry in developing a robust digital payment ecosystem. But the role of an SRO in policy formulation and transparency and accountability provisions applicable to it must be clearly defined.

(Senior resident fellow, Vidhi Centre for Legal Policy. Views are personal)

Source: Financial Express