Super regulator : Greater contention

Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through Financial Code Bill 2013

India is toying with  an idea of super regulator for burgeoning financial sector amid spate of incongruous standpoints of financial regulations. The new Financial Code Bill proposes to create a unified financial regulator merging rest of other regulators  barring RBI, though  very purpose of bringing it to the fore remains unclear. The report of Financial Sector Legislative Reforms Commission headed by Justice B N Srikrishna, has already generated a hectic debate as it waters down RBI’s powers and wets financial regulation in one super notch bureaucracy.  There are valid apprehensions that sole regulator may suffocate financial sector with confusions and turf wars amidst complex nature of financial products and services. Having multiple regulators for varied financial services is a global practice, willing to do away with it is like returning to square one.

Under the proposed regulatory architecture, there will only be two regulators i.e. RBI and a Unified Financial Agency which will merge the existing capital markets, insurance, pension fund and forward markets regulators (Securities and Exchange Board of India, or Sebi; Insurance Regulatory and Development Authority, or Irda; Pension Fund Regulatory and Development Authority, or PFRDA; and the Forward Markets Commission). There has to be different regulatory bodies for capital markets, commodity markets, insurance and banks. Govt. must make it very clear what purpose a super regulator would serve when having at least three apex monitoring authorities in financial sector is a common practice. While IRDA and PFRDA can be merged into one but merging all four is not only irrelevant but unwise.

A closer study of the Financial Bill suggests that it implicitly focuses on pruning RBI’s powers perhaps because RBI hardly designs its policies the way Govt. wishes it to. According to new Financial Code there will be an empowered Monetary Policy Committee which will be though headed by Chief of central bank but five of its seven members will be outsiders. The finance ministry will also send a representative, but without a vote. That means the majority of members will come from outside the RBI and they will be appointed by the government. MPC is a welcome move but the current structure seemingly aims at diluting RBI Governor’s control over monetary policy who can override MPC only in exceptional circumstances.

Non Banking Financial Institutions and Housing Finance Companies have also been kept outside RBI’s ambit which is certainly insignificant as the functions of NBFCs and HFCs are no different from banking institutions, therefore, having different regulator for former and latter is utterly illogical.  RBI will also no longer be Govt’s debt manager and a new body i.e. Public Debt Management Agency will take over this job of raising loans for the government. Even on capital controls, FSLRC has proposed that all issues related to inflows be handled by the government, while RBI should deal with outflows. It also recommends empowering the existing Financial Stability and Development Council, which would be headed by Finance Ministry and not RBI.

The only positive proposal seems to be coming out of this bill is that it specifically addresses issues related to consumer protection. There will be a common Financial Redressal Agency which will handle all type of consumer complaints from bank deposits to exotic derivative products. It will thus spare consumers to go through the varied complex system of grievance registration and redressal for diverse financial services.

FSLRC recommendations have come in the wake of a spate of disagreements between the central bank and the finance ministry over the past decade. Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through this legislation. Financial policies must be governed by an institution independent of Govt. control as it is now. To encroach upon RBI’s authority will only increase further governance problem. Govt. would do well to first contemplate likely repercussions what such a contentious step can bring before moving towards its implementation.