PFRDA has constituted a group to identify areas under NPS which can utilise fintech through a regulatory sandbox approach
Use of fintech applications in the National Pension System (NPS) can help in quick onboarding of customers, executing instructions from subscribers in real time while robo investment advisory services can enable informed choices regarding fund managers and assets with record-keeping becoming seamless.
As digital innovation has helped the financial sector to grow rapidly, the pension regulator has constituted a group to identify areas under NPS which can utilise fintech through a regulatory sandbox approach. The committee has submitted its draft report to Pension Fund Regulatory and Development Authority (PFRDA) and the regulator is seeking comments from various stakeholders.
Fintech sandbox is a framework set up by a financial sector regulator to allow small-scale, live testing of innovations by private firms in a controlled environment under the regulator’s supervision. Regulatory sandbox helps in developing guidelines for newer technologies to promote innovation in order to benefit end-customers. In fact, fintech companies can focus more on the technology implementation and business model.
Considering the enormous potential of fintech innovations, the report has underlined that regulations will need to evolve to ensure subscriber protection without stifling innovation. The committee has recommended that fintech applications can be used in the onboarding process, which would comprise paperless pension account generation, compliance to know your customer (KYC) norms, due diligence and prevention of money laundering.
Use of fintech applications in NPS can make transactions smooth because of flow of contribution from subscribers through banking channels to pension funds, subsequent investments and credit in pension account in near real-time. Robo advisory or Artificial Intelligence can be used for enabling informed choices by subscribers regarding fund manager, assets and switches according to the risk appetite of the subscriber. Fintech applications can be useful in areas of record-keeping such as change in subscriber data, recording payment of contribution and unitisation by exploring use of Blockchain technology. Grievance mechanism can see zero tolerance limit and resolution in near-time can be done. On maturity, seamless funds outflow and integration with annuity service providers can take place.
The report has underlined that only those fintech applications that fall solely within the remit of PFRDA should be allowed to apply. Also, inter-regulatory applications should be kept out of the purview unless the requisite permissions from other regulators are already in place.
The report says that while regulators are keen to promote innovative ideas that can lead to consumer benefit, they also have to proceed with caution to ensure that consumer protection is not overlooked. “Regulation of fintech has to strike a balance between encouraging innovation in order to reap the potential benefits of lower costs, improved transparency and higher consumer engagement, providing space for the evolution of business models, and ensuring that consumers are protected and incumbents are not faced with unfair competition from non-regulated entities,” the report says. The regulations need to be adaptive in order to accommodate the impacts of future, unanticipated technological developments and encourage knowledge-sharing between regulators, supervisors, incumbents and potential new entrants to the pension industry.
Fintech companies are increasing the efficiency of the operation of pension schemes through risk management applications, automation of investment processes and the facilitation of regulatory compliance. The ultimate objective of these programmes is to ensure that innovation is encouraged, improve cost efficiency, process efficiency, consumer interests, and any consumer risks resulting from these innovations are adequately mitigated and financial consumer protection ensured.