Single regulator for financial sector?

Economic Times, March 26, 2013(Also read online comments)


Why high finance needs just one regulator

Hema Ramakrishnan  
Monday March 25, 2013, 04:48 AM

Justice Bellur Narayanaswamy Srikrishna is known for his ability to complete any task entrusted to him within the deadline. That’s what the Chairman of the Financial Services Legislative Reforms Commission (FSLRC) did on Friday when he handed over the report on recasting India’s financial sector laws to finance minister P Chidambaram.

The FSLRC’s core recommendation to have a unified financial regulatory agency to oversee all segments of the financial sector, barring banking and payments, will ruffle regulators who are bent on protecting their turfs. However, unified regulation makes eminent sense, especially when boundaries among financial products are getting blurred. A single agency, entrusted with micro prudential regulation, will reduce the chances of financial collapse and bring down systemic risks. It is also needed to keep an eye on companies that operate in the regulatory twilight zone.

The government may see reason, but is unlikely to rock the boat when the economic climate is uncertain. Not just regulators. Many sceptics are also wary of unified regulation, given the experience of UK’s Financial Services Authority (FSA). It served as a single regulator, but was unsuccessful in preventing the financial meltdown in 2008.

Adair Turner, chairman of the FSA, is said to have blamed deficiencies in regulation as the root cause for failure, not the structure. Nevertheless, the FSA will be abolished next month, and the Bank of England entrusted with the overall responsibility to protect and enhance financial stability.

Unlike the developed world, India staved off the financial meltdown in 2008 after the collapse of Lehman Brothers. The unbundled functions of the central bank came in handy then. But global examples show that no particular structure by itself can guarantee sound regulation. Alternatively, the fact that India’s regulation proved relatively sound does not mean that our regulatory structure is perfect.

So, the FSLRC is spot on when it says that multiple agencies covering financial markets lead to regulatory arbitrage. It looked at a few models. One, asingle agency to enforce microprudential and consumer protection laws for all financial activities. The other, twin regulators: one for microprudential regulation and another for consumer protection, as is the practice in Australia. It settled for its own version, but said that the RBI will focus on monetary policy and continue to supervise banking regulation, payments and settlements, at least for some more time.

The case for unified regulation became compelling after a public spat three years ago between markets watchdog Sebi and insurance regulator Irda over the regulation of unitlinked insurance plans. A potential clash between the pension and insurance regulators over the remit of pension plans cannot be ruled out.

The government will play umpire, with the Financial Stability and Development Council (FSDC) mandated to settle turf wars among regulators. Therefore, in some sense, the country is already experimenting coordination of regulation among all segments of the financial market. There is no reason to fret about unified regulation —it’s a step forward.

Also, India’s financial sector regulators, unlike their global peers, have to help develop the relatively nascent market. Naturally, a regulator may advocate policies conducive to growth and profitability of the sector, but this could clash with interests of consumers. Reintroducing entry loads is an incentive for distributors of mutual funds, but makes the product expensive for investors. Similarly, different financial products are sold by the same distributor whose incentives vary. This, in turn, also leads to regulatory arbitrage. Problems such as these may end with a single agency.

The next question: should the RBI be kept out of the unified agency, making it a half-way house? Ideally, the RBI should be allowed to oversee banking and payments at least for the next five years for the simple reason that it has been able to manage monetary policy better when it supervises banks, manages forex reserves and also government debt.

Other recommendations such as creation of a resolution corporation and single appellate tribunal make sense. It will protect the interests of consumers and make regulators accountable.

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March 25,2013 at 05:41 PM IST
The idea of creating a Unified Financial Agency for all financial regulators except RBI, truncating RBI by separating Public debt Management and keeping the agency doing that work(presumably with the same work force) in RBI premises, later UFA subsuming even RBI all give a feeling that the FSLRC was not allowed to ‘apply its mind’ and in the eagerness to satisfy all, and so fast, it has forgotten its own brief. Perhaps the purpose would be served better, if RBI is allowed to function with its present mandates, a coordination committee sorts out issues among the remaining regulators and if GOI aim is to reduce the number of regulators, merge with RBI, the agencies outside RBI one by one, as work stabilizes. The twin goals of one Unified Financial Agency and managing the man-power-related issued mentioned here, would be better achieved this way.


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