Regulators cannot chase you for compliance, but they can surely chase you out of business

The Reserve Bank of India (RBI)’s recent regulatory stand against Paytm Payments Bank (PPB) is a lesson for many entities where compliance is not a pillar of the organisation and their business model assumes that its creativity and innovation can replace compliance.

 It's essential to steer the narrative away from pitting the RBI-against-Vijay Shekhar Sharma debate. The crux of the matter lies in the RBI's legitimate regulatory expectations of full compliance from the PPB, an entity under its regulation and licensing. Attempts to paint the RBI's actions as a witch hunt or to evoke sympathy through sob stories detract from the core issue at hand — ensuring regulatory compliance and upholding the integrity of the financial system. Engaging in such diversionary tactics only serves to obfuscate the responsibility of entities like the PPB to adhere to regulatory standards and address any shortcomings transparently and expeditiously.

 If a regulator must chase its regulated entities for compliance, it speaks very poorly of the entities. Unless this culture of compliance changes to fundamental sanctity and the way of doing business, it won’t augur well for society.

 ‘Non-compliance is the fast-track to making regulators your new best frenemies’

But then again, here are lessons for the regulators. Take action, proactively. Yes, one can be lenient, but repeated compliance issues cannot be condoned. It would only indicate that the regulatory system may not be independent and under regulatory capture by the industry or influentials. Or that the supervisory capabilities of the regulators are feeble.

Again, when one looks at frantic calls to the regulator to be lenient because of the popularity of the entity, there could be a way out. Save the entity, but dock those who forced the regulatory hands to act with severity.

Financial entities must prioritise full compliance with regulatory requirements to maintain trust, stability, and legitimacy within the industry. Compliance not only ensures adherence to legal and ethical standards, but also mitigates risks associated with regulatory penalties, reputational damage, and loss of consumer confidence. While achieving full compliance is an ongoing endeavour, financial entities should continually strive to improve the quality of their compliance efforts through robust internal controls, regular audits, staff training, and responsiveness to regulatory feedback.

Financial market history is replete with examples of large entities facing severe consequences due to non-compliance with regulations. It is crucial to send a strong message to entrants into the market about the non-negotiable importance of compliance. By enforcing regulations rigorously and holding violators accountable, regulators not only protect investors and consumers but also uphold the integrity and trustworthiness of the financial system.

The pervasive adoption of a ‘growth at any cost’ mantra among many organisations raises significant concerns. When growth (linked to boosting valuations) becomes the singular focus, it can lead to a dangerous neglect of regulatory compliance and ethical considerations. In the pursuit of rapid expansion and market dominance, organisations may resort to cutting corners, disregarding regulatory requirements, and tolerating compliance lapses. This shortsighted approach not only exposes the organisation to legal and financial risks, but also undermines the integrity and stability of the financial system as a whole. Compliance lapses in financial businesses can result in severe consequences, including regulatory sanctions, reputational damage, loss of investor trust, and ultimately, systemic instability.

Innovation or creativity does not mean that one gets a pardon infinitely for anything repeatedly missed. There have been examples of how to solve such a founders’ dilemma.

‘Simply don’t run anything that’s regulated’

Let appropriately qualified and experienced professional leaders run the entity, as well as chair your boards. Stick to being a shareholder, and enjoy the financial outcomes of a well-run and respected entity. In the United States tech field, it is common to see founders not having executive roles, but simply enjoy what they do best — code or program manage software.

That’s a larger message to founders who think compliance is someone else’s job. If you are in the finance business, behave well enough to stay in the field. Regulators cannot keep chasing you for compliance, but surely can chase you out of the race.

(Srinath Sridharan is a policy researcher and corporate adviser. X: @ssmumbai.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.