How DPDPA Impacts Financial Institutions: Compliance Strategies and Challenges 

How DPDPA Impacts Financial Institutions: Compliance Strategies and Challenges 

Article by Tsaaro

7 min read

How DPDPA Impacts Financial Institutions: Compliance Strategies and Challenges 

Introduction 

Upon the introduction and implementation of the DPDPA Act, 2023, the value and recognition of protection for personal data has risen. It has driven better decisions, personalization and innovation though data protection. The DPDPA has addressed privacy and security issues aiming to protect personal data, empowering people and enforcing stringent data processing standards. The Act has been considered as a game changer. It elaborates on safeguarding personal data which gives individuals greater control over their data which establishes such rigorous standards of processing. It is a landmark step towards ensuring that our data is processed ethically and securely.  

The legislative influence of the Act on the financial sector is quite significant, especially in the light of the regulatory changes for the financial sector, the of any such non-traditional entities and the digital transformation mandated by the Act. This Act serves as the guiding framework to manage digital data which is personal and to delicately balance the preservation of the rights of the individuals along with the required data processing mechanisms.  

Financial institutions which provide financial and monetary services leverage personal data to Leverage customer insights which allows firms to craft effective marketing strategies, optimize product positioning, and improve customer experiences. This is crucial for staying connected and relevant to their customer base. Since risk transformation is a core activity for financial services firms, using relevant data enhances risk assessment and enables accurate risk pricing. Further, as mobile devices become primary channels for delivering financial services, customer data insights are essential for creating personalized offerings tailored to individual preferences and needs. Data-driven insights support informed decision-making, process optimization, and efficient resource allocation, leading to cost savings and improved operational efficiencies. Financial services firms face a complex array of regulations designed to protect customers, uphold market integrity, and prevent financial crimes. A thorough understanding of customer data helps these firms effectively manage compliance requirements. 

Although, there already exists a regulatory landscape monitoring and regulating the financial sector in India such as the Prevention of Money Laundering Act, RBI Act, Banking Regulation Act, Information Technology Act etc. This creates an intersection with the new DPDP Act as well for which a scrutinized consideration of legal requirements must be carried out by institutions while collecting, retaining and sharing data which the authorities.  

Impact of DPDPA on the Financial Services Sector  

The Act mandates that entities handling personal data must adopt privacy-by-design and default practices, ensuring alignment with privacy principles. Key requirements include publishing concise and unambiguous privacy notices in multiple languages, including those from the Eighth Schedule, to ensure specific and informed consent from Data Principals. Consent must be obtained through clear, affirmative actions, which may necessitate evaluating current methods like click-wrap agreements for authenticity and implementing additional measures like two-factor authentication. Proof of consent must be stored in a retrievable and auditable manner, as entities must be able to demonstrate consent when required. 

Entities must also accommodate Consent Managers to handle consents and other rights requests. This is especially relevant for financial sectors, where Consent Managers play a significant role. Standardized mechanisms must be developed to authenticate identities and manage requests from Consent Managers. 

The Act’s interaction with sectoral regulations, particularly in highly regulated sectors like finance and Fin-Tech, requires harmonizing these regulations with the new data protection laws. Financial sector regulators have been proactive in issuing regulations for data protection, localization, IT frameworks, and security measures. The Act emphasizes that laws providing higher protection levels will continue to apply, and the Central Government and DPA must harmonize other sectoral laws and regulations. 

The Act limits the processing of data without consent to specific purposes voluntarily provided by Data Principals. Unlike previous drafts, the Act excludes public interest and fair purposes grounds, necessitating a greater reliance on consent. Financial entities can use voluntarily provided data to process inquiries and applications, within the bounds of applicable laws and regulations. 

Internal protocols for data disclosure and sharing with processors must be reviewed. Valid contracts with processors should include technical safeguards, compliance with data principal requests, breach reporting, data deletion, and restrictions on further data sharing. Organizational measures such as access control, incident response, employee training, pseudonymization, and encryption are essential to protect personal data. 

Entities handling significant volumes of personal data may be classified as Significant Data Fiduciaries, which imposes additional obligations like data protection impact assessments, periodic data audits, and possibly appointing dedicated data protection personnel, such as resident data protection officers and independent data auditors. These entities must invest in capacity building to ensure compliance. 

The Act also provides exemptions for certain activities, such as legal compliance, enforcing rights, mergers and acquisitions, debt recovery, and processing foreign nationals’ data by outsourcing entities in India. Startups can avail themselves of exemptions from some requirements, including notice, accuracy, retention limitation, and information access requests. 

Given these comprehensive requirements, entities in the financial and Fin-Tech sectors should undertake readiness assessments to ensure their data processing frameworks are compliant and secure. This includes refining notice and consent architectures, implementing necessary technical and organizational measures, and staying responsive to forthcoming rule-making guidance. The overall goal is to build a future-ready system that aligns with the Act’s stringent data protection standards. 

Significant Data Fiduciaries in the financial services sector will bear greater responsibilities under the DPDPA. Regulators are expected to adapt DPDPA requirements to the specific sub-sectors they oversee and train their supervisory staff accordingly. 

Impact Of DPDPA On the Sectoral Compliance and Data Management Mechanisms  

Entities in the BFSI sector will serve as key data fiduciaries responsible for adhering to DPDPA regulations. Managing risk is a fundamental aspect of their role, and they must secure consent prior to processing any personal data. 

The DPDPA’s emphasis on personal data protection transforms IT and data security protocols. Financial institutions are required to invest in cutting-edge threat detection systems, robust encryption methods, and conduct regular audits to protect customer data from cyber threats. 

Product management should focus on data protection, transparency, and user rights. This involves incorporating “privacy by design,” implementing robust consent mechanisms, ensuring clear user control, providing transparent communication, and establishing well-defined data usage policies. 

Indian financial services companies, which frequently outsource and collaborate with Fin-techs, encounter increased compliance requirements under DPDPA 2023. Data fiduciaries bear the main responsibility for compliance, while significant data fiduciaries will have additional obligations. 

The DPDPA alters the way organizations handle customer data throughout their lifecycle, affecting stages like acquisition, onboarding, service, retention, and loyalty. It stresses the importance of explicit consent, clear data policies, and data minimization. 

Under DPDPA 2023, Indian FinTechs partnering with financial institutions must comply with strict data fiduciary regulations, which will likely transform the RE-Fintech collaboration model. 

Conclusion 

The Digital Personal Data Protection Act (DPDPA), 2023, has significantly impacted India’s financial services sector by prioritizing personal data protection and enforcing stringent data processing standards. Financial institutions must adapt to this new regulatory framework, emphasizing explicit consent, robust IT security, and clear data policies. The DPDPA mandates cutting-edge threat detection systems, strong encryption methods, and regular audits, ensuring customer data protection against cyber threats. This Act also affects how financial data is managed throughout its lifecycle, emphasizing privacy by design and data minimization. Indian financial institutions and FinTech collaborations face increased compliance requirements, fundamentally altering their operational and collaborative models. By setting a high standard for ethical data processing and security, the DPDPA promotes a balanced approach to leveraging data insights while protecting individual rights, marking a pivotal step towards a secure and privacy-conscious digital economy in India. 

Shubham Bansal

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