Financial Sector Legislative Reforms Commission (FSLRC)

Financial sector being a catalyst for the real sector growth has to be dynamic enough to support the growth aspirations. The institutional framework i.e. laws, policies and organizations, governing the financial sector should enable its orderly growth in tune with such aspirations. The existing framework governing the financial sector in the country has been built up over 60 Acts and multiple rules and regulations and many of the financial sector laws date back several decades, when the financial landscape was very different from that of today.

At present, India has a legacy financial regulatory architecture viz., RBI, SEBI, IRDA, PFRDA and FMC. While the objective of RBI is to manage the monetary and credit system of the country, SEBI works towards promotion of orderly and healthy growth of the securities market duly protecting the interests of the investors. Similarly, IRDA promotes and regulates insurance industry and PFRDA deals with pensions and old age income security among all citizens of the country. The Forward Markets Commission (FMC) is the chief regulator of forwards and future markets in India. The regulatory architecture evolved over the years, with a sequence of piecemeal decisions responding to immediate pressures from time to time. The weaknesses in the existing structure are:

• The present arrangement has gaps where no regulator is in-charge.
• Conflicts between regulators / laws.
• An approach of multiple sectoral regulators that construct ‘silos’ induces economic inefficiency.
• Fragmentation of financial firms, which responds to fragmentation of financial regulation, leads to a reduced ability to understand risk.
• Problems are likely to exacerbate.

The Commission was set up at a time when the global economy was recovering from the 2008 financial crisis. At the time, lessons from what went wrong and the possible options were being debated. The Commission could, therefore, assimilate the lessons from the crisis, and at the same time, think and construct a model relevant to the Indian context in a calm and detached manner supported by quality research, extensive deliberations and detailed interaction with a host of experts and stakeholders. The FSLRC’s report proposes a sweeping reorganization of the country’s financial architecture. Indeed, the Act draws from some of the notable features of the US Dodd-Frank Act, the UK’s Financial Services and Markets Act of 2000, financial liberalization in South Korea and recent Indian government committee reports. The report is significant both for its composition and mandate. The FSLRC proposes the following structure:

1.Reserve Bank of India: It is proposed that RBI will perform three functions viz., Monetary policy, Regulation and Supervision of banking in enforcing the proposed consumer protection law and the proposed micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws. It is proposed to create a separate agency to manage public debt, removing these functions from the RBI. Central Government would promulgate ‘rules’ governing inbound capital flows while the RBI would promulgate ‘regulations’ governing outbound flows.

2. Unified Financial Agency: Consolidation of regulation of securities, pensions and insurance into a single, UK Financial Services Authority-style regulator. The current work of the Securities and Exchange Board of India (SEBI), the Pension Fund Regulatory and Development Authority (PFRDA) and the Forward Markets Commission (FMC) would be rolled into a new Unified Financial Authority (UFA).

The unified financial regulatory agency would implement the consumer protection law and micro-prudential law for all financial firms other than banking and payments. This would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in Government agencies. This proposed unified financial regulatory agency would also take over the work on organized financial trading from RBI in the areas connected with the Bond- Currency-Derivatives Nexus, and from FMC for commodity futures, thus giving a unification of all organized financial trading including equities, government bonds, currencies, commodity futures and corporate bonds. The unification of regulation and supervision of financial firms such as mutual funds, insurance companies, and a diverse array of firms which are not banks or payment providers, would yield consistent treatment in consumer protection and micro-prudential regulation across all of them.

3.Financial Sector Appellate Tribunal (FSAT): The present SAT will be subsumed in FSAT, which will hear appeals against RBI for its regulatory functions, the unified financial agency, decisions of the FRA and some elements of the work of the resolution corporation.

4.Resolution Corporation: The present DICGC will be subsumed into the Resolution Corporation which will work across the financial system.

5. Financial Redressal Agency (FRA): The FRA is a new agency which will have to be created in implementing this financial regulatory architecture. It will setup a nationwide machinery to become a one stop shop where consumers can carry complaints against all financial firms.

6. Public Debt Management Agency: An independent debt management office is envisioned.

7. Financial Stability and Development Council (FSDC): The existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.

Advantages of new structure:

• Non-sectoral approach enables the entities to focus attention on the core objectives i.e. Innovation and Consumer protection.
• It envisages that there will not be any room for conflicts of interests.
• One supervisor has a micro view of the risks in the system.

The Independent regulators have become an important part of the policy landscape and the efficacy of the regulators depends on the following factors:

• The regulator is able to setup a specialized workforce that has superior technical knowledge.
• This is assisted by modified human resource and other processes, when compared with the functioning of mainstream Government departments.
• With such knowledge, and close observation of the industry, an independent regulator is able to move rapidly in modifying regulations, thus giving malleability to laws.

The unification of regulation and supervision of financial firms would yield consistent treatment in consumer protection and micro-prudential regulation.