Do we need to overturn financial regulatory system?
Given the manner in which the Sahara Group’s mammoth fund-raising slipped through India’s various financial regulators, or how the turf war between Sebi and Irda resulted in sales of fresh ULIPS being stopped for a few months, India’s financial sector regulatory system needs some pretty serious fixing. More so when you consider it will be at least 8 times as large in the next 30 years or so (based on its current proportion of GDP and the rise in GDP) and will be far more complex than it is today. The HLCC coordination mechanism between various independent regulators is supposed to take care of this, but we’ve seen too many examples of this not working in the manner it should.
Which is why the government constituted the Financial Sector Legislative Reforms Commission (FSLRC) under Justice BN Srikrishna to rewrite and harmonise financial sector legislations, rules and regulations. FSLRC’s just-released discussion paper on the benefit of a unified financial regulatory agency—with an RBI stripped of its Debt Management Office (DMO)—seeks to collapse individual regulators like Sebi and Irda into one Unified Financial Agency. At one level, the proposal makes a lot of sense—while commodities markets are obviously different from financial ones, at a more fundamental level, they’re both about selling products that seek to mitigate risk and, more often than not, the players in both are the same. In which case, why can’t the capital markets regulator also regulate commodity markets? That, the discussion paper says, regulators must be legally obliged to analyse the costs and benefits of each proposed regulation is a breath of fresh air given how arbitrary so many regulatory actions are right now. And while it’s true RBI governs banks, given that banks have other risk—pension/insurance/brokerage—a more holistic look is not out of order.
The debate which the discussion paper calls for promises to be interesting, not least because some regulators will protest their being subsumed into an omnibus regulator—others may root for the proposal in the hope they may get to head the body! But it’s not a one-sided argument. It’s not clear an RBI without a DMO, for instance, is necessarily a good thing though the oft-cited argument is an RBI with a DMO has conflicting objectives and makes RBI biased in favour of low interest rates. But as long as there’s a fiscal deficit, a truly independent DMO not coercing PSU banks to buy government debt could push interest rates so high it would hit economic activity. Though the discussion paper votes to keep banking supervision within RBI, an extreme view has been the central bank’s role should be restricted to monetary policy with banking supervision a part of a financial supervisory agency’s remit—this was withdrawn in the UK and banking supervision given back to the Bank of England after the Northern Rock fiasco. All these issues need resolution, though the reason for wanting a unified regulator has to be better than the reason (one of the reasons actually) cited in the discussion paper—that, given the paucity of talent and domain expertise in government, it would be easy to staff one regulator rather than many!