RBI issues guidelines for the self-regulatory organisation for payment system operators

The Reserve Bank of India (RBI), as the regulator of payment and settlement systems in the country, on Thursday issued final guidelines to set-up a self-regulatory organisation for payment system operators as part of its payment and settlement systems vision.

The framework will enable the central bank to recognise a self-regulatory organisation (SRO) for payment system operators (PSOs). The plan was announced in February 2020 monetary policy.

The regulatory circular said, "Interested groups/ association of PSOs (banks as well as non-banks) seeking recognition as an SRO may apply to the Chief General Manager, Department of Payment and Settlement Systems, Central Office, 14th Floor, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001. The applications shall comply with the instructions laid down in the Framework." 4. This directive is issued under Section 18 read with Section 10(2) of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

An SRO is a non-governmental organisation that sets and enforces rules and standards relating to the conduct of its members to help protect customers and promote ethical and professional standards.

An SRO can help frame rules for system security, pricing practices, customer protection measures, grievance redressal mechanisms, among others, and is expected to resolve the disputes among the members internally through mutually accepted processes to ensure that members operate in a disciplined environment and even accept its penal actions by SRO.

An ideal SRO would function beyond the narrow self-interests of the industry and address larger concerns, such as protecting customers, furthering training and education and strive for the development of members, the industry and the ecosystem as a whole.

Regulations, standards, dispute resolution and enforcement by an SRO get legitimacy not just by mutual agreement of its members, but also by the efficiency with which self-regulation is perceived to be administered. Such regulations supplement but do not replace, applicable laws or regulations.

Characteristics of an SRO

1) An SRO is expected to have the following characteristics in order to gain the trust and confidence of its members:

2) Authority, derived from membership agreements, to set behavioural and professional standards and enforce them on the members.

3) Objective and well-defined processes to make rules and enforce them among members.

4) Standardised procedures for handling conflicts and disputes, as well as methods to resolve them through a transparent and consistent dispute resolution mechanism.

5) Effective means of oversight over its members and ensuring that they adhere to the rules and regulations of the industry as also mutually accepted ethical and professional standards of behaviour.

6) Develop surveillance methods for effective monitoring.

Eligibility for Recognition of an SRO by RBI

1) The SRO shall be set-up as a not-for-profit company under the Companies Act, 2013.

2) Only regulated payment system entities, viz, banks and non-bank PSOs can be members of an SRO.

3) The SRO shall be professionally managed with clear bye-laws.

4) The memorandum / bye-laws of the SRO shall specify the criteria for admission of members and the functions it will discharge. It shall also provide for the manner in which the Board of Directors (governing body) would function.

5) RBI may, if it deems necessary, require that the appointment of important positions in the Board of Directors of the SRO be subject to its prior approval.

6) The SRO shall be financially viable to carry on the activities handled or assigned to it. The fee for membership of the SRO shall be reasonable and uniform across all members.

Requirements Related to Management of Affairs of the SRO

1)The Board of Directors and management of the SRO shall satisfy the fit and proper criteria (FPC) on an ongoing basis. Here, FPC would mean that the person is of high integrity, with blemishless character and having relevant expertise in relevant fields in the payments ecosystem.

2)Any change in directorship or adverse development about any Director shall be immediately reported to RBI.

3) At least one-third of members in the Board of Directors shall be independent and not associated with member institutions.

4) The Board shall frame a code of conduct to be followed by its members.

5) The SRO should be in a position to monitor adherence to the code of conduct as well as compliance with regulations by its members.

6) The SRO shall follow transparent practices for establishing its governance processes; setting standards, prescribing benchmarks, etc.

Grant of Recognition as an SRO

1) A group/ association of payment system operators (banks as well as non-banks) shall apply to RBI seeking recognition as an SRO.

2) RBI reserves the right to require the applicant to submit further information or clarification as deemed necessary, before deciding on the grant of recognition as an SRO.

3) On finding the applicant suitable, RBI shall issue a "Letter of Recognition" as an SRO.

4) RBI, if in its considered opinion, concludes that the SRO is functioning in a manner detrimental to the public interest, it may withdraw its recognition to an SRO after giving due opportunity to the entity to further its views/ comments.

The central bank said the SRO shall be set up as a not-for-profit company under the Companies Act of 2013 and only regulated payment system entities such as banks and non-bank PSOs can be members of the SRO. At least one-third of the members on the board of directors of the SRO shall be independent and not associated with member institutions. The board shall frame a code of conduct for the members.