Payments Regulatory Board: Merits and Criticisms

[Tishya Saran and Aayush Grover are both 5th year students of Government Law College, Mumbai]

Introduction

The Reserve Bank of India (“RBI”) and the Central Government seem to be embroiled in a regulatory tussle. It all started when an Inter-Ministerial Committee (the “Committee”) set up by the Department of Economic Affairs, in a report published by it (the “Report”), proposed the establishment of an independent Payments Regulatory Board (“PRB” or the “Board”) for regulating and monitoring the payments system of the country. In the wake of the Report, the RBI, on 19 October 2018, took a firm stance against the said proposal.

While there was always consensus about the establishment of a PRB, a separate regulator altogether was not what the Government had in mind. In 2017, the Payments and Settlement Systems Act, 2007 (“PSS Act”) had been amended to incorporate a PRB, comprising of six members (three from the RBI and three members nominated by the Central Government). The RBI was to act through the Board.

In a four-page dissent note, the RBI has rejected the recommendations stating that “[t]here is no case of having a regulator for payment systems outside the RBI”, while also adding that it is not totally against a new PSS Bill, if necessary. In this post we try to reiterate the issues put forth by both sides and analyse the efficacy of all arguments from each side.

Should there be a separate PRB?

The Committee submitted a draft PSS Bill, 2018 back in September. Among other things, its highlight was the proposal for establishment of an independent PRB, not within the purview of the RBI (as it currently exists). It was noted that the current provisions of the Finance Act do not provide for the appointment of a whole-time member, and the same was addressed by recommending a broad-based composition and provision for a whole-time director and four whole-time members. In order to justify such radical proposals, which would inevitably have to be followed by sweeping changes in the regulatory regime, the Committee cited consumer protection, systematic stability and healthy competition and innovation as the major factors which influenced their decision.

While several payment startups are all for the move, describing the same to be progressive in nature, other experts suggest that there is no need to formulate a separate board as it would require major overhaul of the existing system. A compelling argument by those in favor has been that the RBI ought to maintain an arm’s length distance from the market, by removing its commercial presence in the form of RTGS, NEFT and NCES payment systems. It is unfair for a regulator to have its own horse in the race, which could lead to a conflict of interest. The RBI, according to a few experts, ought to spin off such systems to a separate entity, which could be regulated by it in the same manner as it would regulate all other players. This would eliminate anti-competitive practices. However, if the RBI were to divest such systems to another entity, there would be no need for an independent regulator such as the PRB. Other issues that were highlighted by players in the industry were that the RBI is but one body, and that a separate specialised regulator for the payment system may pave the way forward for quicker responses and better legal clarity for new payment system providers looking to enter into the market.

On the other hand, the RBI while staunchly opposing the view has said ‘if it ain’t broke, don’t fix it’. In its dissent note, the RBI mentions: “There has been no evidence of any inefficiency in payment systems of India. The digital payments have made good and steady progress. India is gaining international recognition as a leader in payment systems. Given this, there need not be any change in a well-functioning system”. On the point of restriction of competition and innovation, the RBI rebuts that the existence of multiple players and that a myriad of systems in the market is proof of the health of the existing system. If there are specific concerns which the current PSS Act, 2007 overlooks, amendments to address such gaps could be made. A major overhaul of the entire system seems unnecessary.

The RBI has also resisted the move to separate its settlement function from its role as a regulator of payment sector. It maintains that settlement systems go hand in hand with payment because settlement systems are finally posted in the books of account of banks with the RBI to attain settlement finality. Thus, separating the two will create a dichotomy of regulators, which is undesirable and inconvenient.

The Committee has recommended coordination between the RBI and the PRB, where their jurisdictions would overlap. However, the RBI has insisted on integrated functions instead of coordinated ones as coordination is required across different but related functions, which is not the case for payment systems.

Best practices cited                                                                                                               

To justify a separate PRB, the RBI has cited a plethora of countries where the payment system regulator is under the umbrella of the central bank, which is the governing authority. This, according to the RBI, must be understood as the accepted international norm. To illustrate the RBI has cited the models in England, Australia, Germany, Japan and so on.

The Committee, while responding to many such models, has mentioned that in all these countries the model proposed by the Committee is the one that finds support and not the other way around. The Committee justifies its stand by stating that the fact that in some jurisdictions there are regulators and supervisors which are different from the Central Bank is proof that regulation and supervision of payment system is not a natural corollary of a Central Bank’s currency management.

That may be true, but each country’s model will have to be examined on a case by case basis, while comparing it to what might work best for India. This, especially so, since neither side wants to concede.                                                                                                                               

Why is SAT the adjudicatory body for dispute resolution?

While most proposals put forth by the committee are fairly reasonable, one stands devoid of any fathomable reason. The Committee has recommended for the Securities Appellate Tribunal (“SAT”) to be the appellate adjudicatory body to resolve disputes arising under the PSS Bill. The Committee does not shed any light on why the SAT, in particular, was chosen as the appellate body. However, the RBI, in good sense, brings up the issue in its comments to the Report as well as in its dissent note.

It is also peculiar how this issue in particular has not been the centre of more debate and discussion. One would think that the Report of the Committee would be further undermined by how suggestions such as these show non-applicability of mind on behalf of its members.  However, most commentators have overlooked this provision as a minor inconsistency in the proposed legislation.

Conclusion

The prospects of establishing an independent PRB are still in its nascent stages and it is too early to gauge the intentions of the Government. Power tussles between the Central Government and the RBI are not novel. So, one must also keep in mind the fact that the model for an “independent” regulator could come with its own baggage. For all we know the PRB’s greater dependency on the Central Government could lower its chances to monitor and regulate the sector properly. In the case of many other independent authorities, including the Lokpal, Telecom Regulatory Authority of India (TRAI) and Central Pollution Control Board (CPRB) where the members need to be appointed by the Centre, appointments are hardly ever made in time and bureaucracy runs rampant. Further, a majority of the members on the Committee are representatives of the Central Government, whereas, the RBI stands in minority. Thus, it is unclear whether the move for an independent PRB is one for independence or greater control by the Central Government.

At the same time, proposals such as that of SAT as an appellate body for dispute resolution also makes one wonder whether or not the Committee has thought its proposals through. Radical changes to the existing system, cannot be rushed and certainly must not be devoid of application of mind. In our view, it would be better if the Report was further refined and all its practicalities examined, before such measures are implemented.

Given the health of the banking sector, it would, admittedly, be prudent for the RBI to focus on its function of being a regulator, instead of shifting its focus from its core responsibilities. But is the creation of an unsupervised regulatory board the best to achieve that result? Only time will tell.

Tishya Saran & Aayush Grover

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