You are reading it here first: The Payments Council of India (PCI) is looking at setting up a self-regulatory organisation (SRO) representing several payments systems operators (PSOs) under the Reserve Bank of India’s (RBI) framework for PSO SROs, two senior payments officials told MediaNama. The officials said that the PCI will continue to function as an industry body for non-bank payments player under the aegis of the Internet and Mobile Association of India, while an exclusive organisation will be floated to qualify as an SRO with the RBI.

In February this year, the RBI stated that it would create a framework for authorising SROs for the payment system which will serve as a two-way communication channel between the players and the regulator. According to RBI’s final framework, published on October 22, the SRO is responsibly for setting and enforcing rules and standards across the industry while protecting the customer and promoting ethical and professional standards.

As the payment ecosystem matures and the number of payments systems proliferate, it becomes necessary, in the interest of optimal use of regulatory resources, that the payments industry develops standards in respect of system security, pricing practices, customer protection measures, grievance redressal mechanisms etc. While self-regulation would release regulatory resources that can be better focused on issues of systemic importance, it would, by virtue of being developed by the industry itself, be more appropriate and encourage better compliance.

RBI Framework for Recognition of a Self-Regulatory Organisation for Payment System Operators

Self-regulation as opposed to independent regulation

In its December 2016 report, the Ministry of Finance (MoF) committee on digital payments had recommended that the payments industry should be independently regulated from the function of the RBI. The committee was headed by former finance secretary Ratan P Watal.

The RBI regulates the payments industry through circulars and notifications under the Payment and Settlement Systems (PSS) Act, 2007 and through the Board for Regulation and Supervision of Payment and Settlement System (BPSS), a central bank sub-committee, which is responsible for prescribing policies and setting standards for the industry.

The Watal committee found that while many international countries had set up independent payment regulators, India followed the model of vesting the powers of payments and settlement regulation within the central bank. It found that the PSS Act of 2007 did not address principles of ownership neutrality, technology neutrality, competitive neutrality and infrastructure neutrality when it came to regulating, which meant that there were differential regulatory requirements for bank and non-bank PSOs.

The Committee observed that the present framework relating to the operation
and functions of the BPSS, fail to empower the BPSS with adequate resources
to be able to encourage innovation in payment systems

Watal Committee on Digital Payments December 2016

The committee said that while the central bank is ideally placed to provide macro-economic regulations, financial stability and systemically-important matters, an independent regulator for the payments industry would be better suited to look after issues of competition, user convenience innovation. Therefore, it had recommended that the government either create a separate Payment Regulatory Board within the central bank, with members from the RBI and the industry.

The committee had recommended that the MoF institute the PRB within one month’s time from the publication of its recommendations. The development of an SRO for the payments system comes at a time when neither the government nor the RBI has created a the PRB.

Functions and responsibilities of the SRO

  • The recognized SRO will serve as the voice of its members in public discussions or interactions with the RBI or any other authority.
  • It should set minimum benchmarks, ethical and behavioral standards and work towards developing the payments industry as a whole not just its members.
  • The SRO will be responsible to inform the RBI about violations with regards to the Payments and Settlement Systems Act, 2007 or other regulatory guidelines.
  • Establish a uniform grievance redressal and dispute resolution framework for its members.
  • Conduct research and development on the safety and security of the payments ecosystem.
  • The SRO will be have to provide information sought by the RBI, when requested or periodically, and will be invited by the regular for periodic interactions.
  • The SRO must abide by the RBI’s directions and should supplement and complement the present regulatory  and supervisory arrangements

Eligibility criteria to be recognized as an SRO

  • The SRO must be a not-for-profit company under the Companies Act, 2013
  • Only banks and non-bank PSOs can be members of SRO, which will be professionally managed
  • For important positions on the Board of Directors (BoD) of the SRO, the RBI may require prior RBI approval
  • The SRO should be financially viability and the BoD shall satisfy the fit and proper criteria (FPC) on an ongoing basis.
  • At least one-third of members on the BoD should be independent and non associated with the SROs member institutions.
  • The SRO must establish transparent practices in its governance processes
  • A group or association of PSOs can apply to the RBI seeking recognition as an SRO
  • The RBI will issue a Letter of Recognition to the group or association of PSOs as an SRO, but can withdraw the recognition if it finds it is functioning in a manner detrimental to the public interest