In furtherance of the Reserve Bank of India’s (“RBI”) Non-Banking Financial Company – Account Aggregator Master Directions (“AA Master Directions”), the Securities and Exchange Board of India (“SEBI”), on 19th August 2022, issued a circular announcing its participation in Account Aggregator (“AA”) framework.
By way of brief background, in 2016, the RBI had issued the AA Master Directions introducing the AA framework for compliance by every Non-Banking Financial Company undertaking the business of AA. The AA framework was established with the objective of facilitating consolidation, organization, presentation of the financial information of a customer after obtaining the consent of the customer. AAs essentially act as intermediaries that are responsible for collecting and sharing the financial information from Financial Information Providers (“FIP”; entities that hold the financial data) with Financial Information Users (“FIU”; entities that request data).
For instance, if a customer approaches a bank to seek a loan then, under the AA framework, this bank (in its capacity as an FIU) will request the AA to share the financial information of the customer to check the customer’s credit worthiness. The AA would then approach the customer to obtain their consent to share the information with the FIU. Once the consent is obtained, the AA will then request the FIP to share the encrypted financial information with the AA for it to be transferred to the FIU. The information so obtained will only be used for the purpose for which the consent was obtained.
In the AA Master Directions, the term FIP has been defined to mean “bank, banking company, non-banking financial company, asset management company, depository, depository participant, insurance company, insurance repository, pension fund and such other entity as may be identified by the Bank for the purposes of these directions, from time to time”.
Through its circular, SEBI has directed asset management companies and depositories (that are included in the definition of FIP) to act as FIPs through their Registrars and Transfer Agents in the securities market. The FIPs in the securities market have been permitted to provide financial information, pertaining to inter alia stock holdings, depositories, and mutual fund, to the FIUs through RBI’s registered AAs.
As per SEBI’s circular, FIPs of the securities market are required to enter into a contractual agreement with the AAs providing the rights and obligations of each party as well as specifying the modalities of the dispute resolution mechanism.
SEBI has further stipulated rules pertaining to, inter alia, consent verification, real time response, setting up of IT framework as well as interfaces for exchange of data, maintenance of logs with the information on requests and actions performed, disclosure of names of AAs through which FIPs in the securities market will share data etc., to ensure smooth functioning of the AA framework in the securities market. Additionally, SEBI has clarified that participation in the AA system will not affect the existing system of issuance of Consolidated Account Statements to the investors by depositories or asset management companies providing consolidated information of the mutual fund investments and holdings of investors in Demat accounts
RBI’s AA framework simplifies collection and compilation of financial information from multiple sources and allows for seamless relaying of this information to another entity. Sharing information with an AA makes processing of such information faster and the consent mechanism stipulated in the AA Master Directions provides significant control of the financial information to the customer whose financial information is being shared.
This framework has been further strengthened with the SEBI’s participation as it allows customers to share information on stock holdings, mutual funds etc. in an easy and efficient manner, eliminating the inconvenience of sharing physically signed and notarized copies of documents in the traditional method.
Lastly, SEBI’s involvement diversifies the AA framework (which was originally created for banks) and makes it cross sectoral, further allowing customers and investors to widen the scope of their investments.
Link to SEBI’s circular pertaining to its participation as Financial Information Provider in Account Aggregator framework: https://www.sebi.gov.in/legal/circulars/aug-2022/participation-as-financial-information-providers-in-account-aggregator-framework_62157.html
Link to RBI’s Non-Banking Financial Company – Account Aggregator Master Directions: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10598