[Dhaval Bothra and Rajdeep Bhattacharjee are law students at Symbiosis Law School, Pune]
The Reserve Bank of India (“RBI”) recently unveiled the “Draft Omnibus Framework for recognising Self-Regulatory Organisations (“SROs”) for Regulated Entities (“REs”)”, which represents a significant change in recognizing SROs for REs under its authority. The Draft Omnibus Framework outlines the essential qualities that SROs must possess, such as the authority drawn from membership agreements to enforce ethical and governance standards. It emphasises the need to improve compliance by implementing transparent procedures in rule-making and enforcement, promoting a strong compliance culture, and establishing standardised dispute-resolution mechanisms. However, a careful examination reveals specific areas that require scrutiny. An essential factor entails the identification of possible gaps in the regulatory power given to SROs and to proactively resolve any weaknesses that may emerge in the changing regulatory environment.
Furthermore, it is crucial to evaluate the efficacy of transparent procedures in the creation of rules, which requires an examination of possible drawbacks or inefficiencies that may compromise the desired goals. The Draft Omnibus Framework’s focus on ethical and governance standards prompts a deeper examination of the potential impact of these standards on industry practices with a view to identifying any unintended gaps or difficulties that may arise throughout the implementation process. Additionally, assessing the influence of governance norms on safeguarding the interests of stakeholders necessitates a sophisticated comprehension of potential deficiencies in protecting the concerns of different stakeholders.
This approach to analysis systematically examines the many aspects of the Draft Omnibus Framework and proactively identifies and resolves any potential shortcomings, resulting in a more thorough and resilient regulatory framework for the financial sector.
Comparative Evaluation with SEBI’s Regulatory Landscape
Endeavouring to promote self-regulation, the Draft Omnibus Framework highlights a significant transformation in India’s financial regulatory environment. Notable contrasts become apparent when comparing the RBI’s Draft Omnibus Framework, 2024 with the Securities and Exchange Board of India (Self Regulatory Organizations) Regulations, 2004(“SEBI SRO Regulations”). The RBI’s Draft Omnibus Framework demonstrates a wider range of coverage by expanding the SRO framework to include RE and placing significant emphasis on a comprehensive sector-based approach. SEBI SRO Regulations first focused on a certain group, namely distributors of asset management companies and portfolio managers.
The objectives and features stated in the corresponding frameworks also demonstrate changing priorities. The RBI’s Draft Omnibus Framework emphasises ethical and governance standards, compliance, innovation, and a culture of ethical conduct, demonstrating a proactive approach to current market dynamics. In contrast, the SEBI SRO Regulations had a primary focus on enhancing market discipline, transparency, and investor protection in the designated sectors.
The allocation of governance and responsibility to SROs serves to differentiate the two regulatory frameworks. The RBI’s Draft Omnibus Framework underlines that SROs have two main responsibilities: encouraging best practices among its members and supporting the RBI in ensuring compliance, sector development, and stakeholder protection. SEBI SRO Regulations focused mainly on market discipline, compliance with regulations, and safeguarding investor interests, without the additional responsibility of helping regulatory authorities.
Another notable distinction is highlighted by the sector-specific application. Although RBI’s Draft Omnibus Framework is expected to encompass a wide range of financial services, the SEBI SRO Regulations were initially focused on a narrow section, which may have restricted their overall influence.
Notwithstanding these favourable advancements, obstacles endure even after the implementation of the RBI’s Draft Omnibus Framework. Potential obstacles include difficulties in implementing, reluctance to adopt change, and the requirement for efficient enforcement methods. The RBI and SEBI will face a crucial challenge in striking a balance between promoting innovation and upholding regulatory strictness. Moreover, maintaining uniform adherence in a varied financial environment presents a continuous difficulty.
These regulations and their differentiation highlight the changing character of India’s financial regulation, as evidenced by the RBI’s Draft Omnibus Framework, which indicates a shift towards a more comprehensive and proactive strategy. Nevertheless, there are ongoing difficulties that necessitate constant adjustment and improvement to attain the intended regulatory results.
Unraveling Benefits and Challenges in SRO Implementation
Potential Benefits
SROs have the potential to revolutionize financial regulation by fostering a culture of compliance, innovation, and ethical conduct. They can achieve this by setting robust ethical and professional standards, promoting best practices through education and knowledge sharing, and providing technical expertise and feedback to regulators on emerging technologies and products. This can lead to fewer regulatory infractions, increased public trust in the sector, and the development of more effective and targeted regulatory policies. For example, the UK’s Stewardship Code exemplifies how SROs can revolutionize financial regulation. Due to its voluntary nature but rigorous yet flexible framework, it fosters a culture of compliance, innovation, and ethical conduct. Through continuous improvement, knowledge sharing, and demonstrably positive impacts on investor engagement, company performance, and public trust, the Code showcases how SROs can drive fewer infractions, rebuild trust, and inform targeted regulations.
Furthermore, SROs offer a triple-barrelled approach to optimizing financial regulation: they enhance dialogue through unified representation, inform policymaking with granular data and insights, and streamline oversight by shouldering compliance monitoring and grievance redressal, thereby allowing regulators to focus on broader systemic concerns and fostering a more informed, efficient, and targeted regulatory landscape. For instance, the Financial Industry Regulatory Authority in the United States of America is an SRO that has the power to license securities dealers, audit dealers and associated firms, and ensure compliance with regulations and it recently fined Bank of America $24 million for spoofing treasuries.
Challenges
The very structure of SROs can be susceptible to capture by large players, potentially warping codes of conduct and fostering a culture of overlooking misconduct by influential members. To counter this, robust governance structures with independent oversight are crucial. Such mechanisms ensure diverse perspectives and neutral enforcement, preventing SROs from becoming echo chambers for dominant voices. Furthermore, limited enforcement powers can render SROs toothless when faced with serious transgressions. To avoid this paralysis, a clear delegation of enforcement authority from regulators is essential, with defined thresholds for intervention. This will provide SROs with the necessary bite to effectively enforce their own rules. For instance, the Digital Advertising Alliance (“DAA”), an SRO that promotes responsible data collection and use for online behavioral advertising implemented various reforms, such as strengthening its enforcement mechanisms, increasing transparency, and enhancing its governance structure via “DAA Self-regulatory Principles.”
However, concealed breaches can still cast a long shadow, potentially undermining trust and efficacy. Utilizing proactive monitoring tools and robust whistle-blower protection is essential in unveiling hidden misdeeds and preserving system integrity. Ensuring equitable representation and compliance is vital to address the challenge of “captured representation,” particularly in smaller entities and niche segments where voices may be marginalized. Implementing fair representation mechanisms, such as weighted voting systems or dedicated seats for diverse constituencies, is crucial for inclusive decision-making. To understand this better, we can have a look at the Investment Industry Regulatory Organization of Canada. It fights “captured representation” through a multi-layered approach. Its board features independent directors, ensuring diverse perspectives, while a dedicated Public Advocate champions investor interests. Extensive consultations, an Investor Advisory Committee, and public transparency further guarantee balanced decisions, benefiting both smaller firms and the entire investment landscape.
The burden of compliance can disproportionately affect smaller/newer entrants. To resolve this, the adoption of tiered membership structures or differentiated regulatory requirements tailored to specific sizes or business models and promoting a more equitable distribution of the compliance burden can foster a level playing field. For instance, MiFID II of the European Union categorizes investment firms based on size and complexity, applying targeted rules and reporting obligations to each category. This avoids overburdening smaller firms with excessive regulations designed for larger institutions.
Conclusion
Looking ahead, the RBI’s Draft Omnibus Framework presents a promising vision for the future of financial regulation, emphasizing self-regulation, ethical conduct, and compliance. To ensure the successful implementation of this forward-looking framework, it is imperative for regulators to proactively address potential challenges. This includes mitigating the risk of capture by powerful entities through robust governance structures, defining clear enforcement authority for SROs, and establishing mechanisms to unveil concealed breaches. Additionally, fostering equitable representation and compliance, especially for smaller entities, is vital for a balanced decision-making process. As the financial landscape evolves, there is a need for ongoing refinement and adaptation, leveraging lessons from global regulatory practices. Recommendations include exploring tiered membership structures and differentiated regulatory requirements to alleviate compliance burdens on smaller entities, as seen in the European Union’s MiFID II. By prioritizing innovation, accountability, and inclusivity, the RBI can pave the way for a resilient and effective financial regulatory framework that aligns with the dynamic needs of the industry and safeguards the interests of all stakeholders.
– Dhaval Bothra & Rajdeep Bhattacharjee
