By Amol Agrawal
The emergence of digital platforms and apps have kept the financial regulators on their toes. There is still a lot of fog around technological developments, leading to reactive rather than proactive policies. We can see this close game between technology and regulation by closely tracking the policies of India’s three financial regulators.
The banking regulator, the Reserve Bank of India (RBI), issued regulatory directions on electronic platforms in 2018. The directions defined platforms, laid out eligibility criteria, financial and technological criteria, risk management norms, etc, for the platforms. The RBI followed this up by issuing a list of approved and unapproved forex market and payment providers. In the June 2023 Monetary Policy Press Conference, one concern raised was that some of these unauthorised forex platforms are still listed on Google Playstore. The RBI responded saying it is following a two-pronged approach: by building awareness among the public, and by working with various enforcement agencies to seize assets of these platforms.
The capital markets regulator, the Securities Exchange Board of India (Sebi), issued regulatory directions for bond platforms in November 2022 and MF platforms in June 2023. Sebi had noted that there has been mushrooming of both kind of platforms. There are Indian fintech companies that had developed platforms to enable trading in bonds. The investment advisors/stock brokers (IA/SB) had started enabling investors to invest in the direct plans of mutual fund schemes via their digital platforms.
The bonds and MF platforms had become very popular, particularly with retail investors, as they provide experience similar to online shopping websites. The pandemic also led to significant rise in demat accounts and investors in the securities markets. The issues with the rise of such platforms is that there is no regulatory oversight and the retail investors might not understand the risks. Thus, there was a need to issue regulatory frameworks for both MF and bond platforms.
The insurance market regulator, IRDAI (Insurance Regulation and Development Authority of India), has permitted two kinds of online intermediaries: Insurance Self Network Platform (ISNP) and Insurance Web Aggregators (IWA). ISNP is an electronic platform set up by any insurer or insurance intermediary like brokers, corporate agents and web aggregators. IWA provides an online interface for comparing products of different insurers and other related matters. The regulations on IWA have been there since 2013 and regulations on ISNP since 2016. IRDAI has a list of IWAs on its website and has orders against some of these providers on its website.
The three cases show how there are both similarities and differences in the way the platforms and regulators are engaging with each other.
The similarity is that in all three markets, the platforms and services emerged before the regulators could regulate them. There have been large gaps in delivery of financial services which has been noted by multiple committees. The customers have faced problems in either getting access or high inconvenience in banking, payments and insurance services. The technology and platforms helped address these gaps right away. However, with mushrooming of platforms there was a need for regulation to mitigate risks.
In a way, hardly new; because, whether it is banks, capital markets or insurance, the players and products have emerged before the regulators and regulations. The RBI was established in 1935, Sebi in 1988 and IRDAI in 1999. Needless to say, banks, capital markets and insurance have existed much before the regulators. In fact, they faced more difficulties in coming up with regulations as the players existed decades before the regulators.
The difference is how the three regulators are approaching regulation of platforms. The need for forex or mutual funds is driven by demand. These markets have also developed and deepened overtime. The banking and market regulators are more concerned about lack of oversight and safeguarding retail investors from mis-selling of these products.
In case of insurance, the situation is different. While there is no real case for forex or mutual funds for all, there is a case that insurance should be as inclusive as possible. In fact, IRDAI has made a mission to provide insurance for all by 2047. Insurance is also a very complex business and, despite platforms, it is not easy to compare and buy products. Thus, for insurance, apart from regulation, there is also a need to make policies for inclusion and increasing transparency. Therefore, IRDAI is nudging the insurance providers (both life and non-life) to build a platform named ‘Bima Sugam’. ‘Bima Sugam’ will act as a one-stop shop for selecting, comparing and buying all the insurance products. IRDAI hopes the new platform is up soon and help in achieving its twin goals of inclusion and transparency.
To sum up, much of the discussion on impact of digital finance remains on products and services. The discussion is muted on how digitalisation is impacting financial market regulators, especially in space of capital markets and insurance space. The above analysis shows how the three financial market regulators are responding to the opportunities and challenges of electronic platforms. The technology journey has hardly ended and the regulators will have to keep digging in to develop and safeguard the financial system.
The author teaches at Ahmedabad University