1273501, Amandeep Attri, F1, Q3 - Regulating the Regulators: Need for Super Regulator?

Introduction 

In India, the regulation of financial services industry is widely dispersed among a number of regulators. There are different regulators for the different sectors of the economy. However, the financial service segments are interrelated. No one segment can work independently. Therefore, sometimes the regulations may be conflicting. So, the question has arisen about the need for super-regulator.

Talks about financial super-regulator started, when SEBI attempted to regulate unit-linked insurance plans (ULIPs), trying to take it away from IRDA. The inability of the two to settle the affair amicably triggered the government move of creating a structure that ensures the financial regulators are formally subservient to the Ministry of Finance. Notably, RBI had opposed the proposal of the Finance Ministry appointing itself as the supervisor of IRDA, RBI and SEBI, citing various reasons including lack of focus and unconvincing results in the foreign countries following the same practice.

No doubt, a unified approach is much better than multi-regulatory model. It will help avoid confusions and disputes. But do we really need a super-regulator? Is this a more efficient way of ensuring financial oversight?  Enactment of this body shall effect the transfer of powers of sectoral regulators to the super regulator; it will challenge all the sectoral regulators who are already experts in their fields.

Discussion:

Does India need a legal super-regulator?

In his budget speech, Finance Minister Pranab Mukherjee outlined a proposal to set up an apex level Financial Stability and Development Council. Although many more details will have to be worked out, the Council will co-ordinate the activities of the existing financial sector regulators, including the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority.

By setting up the Council, the government “hopes to strengthen and institutionalise the mechanism for maintaining financial stability.''

The Law Ministry set off fireworks of a different kind in the legal community! The draft Legal Practitioners Act proposes to set up a Legal Services Board - that will regulate the legal profession. But isn't that what the Bar Councils do? And if, as proposed, they all co-exist (the State and Central Bar Councils & the Legal Services Board) won't there be overlap and confusion? So is this a trimming of the Bar Councils power? Or much needed quality oversight of the legal services industry?

Justified or not, the draft Bill proposes that the Legal Services Board must

(a) protect and promote public interest
(b) support the constitutional principle of the rule of law
(c) improve access to justice;
(d) protect and promote clients interests
(e) promote healthy competition within the legal industry
(f) encourage an independent, strong, diverse and effective legal profession
(g) create legal awareness amongst the general public
(h) and promote and maintain adherence to the professional principles
But President of the Society of Indian Law Firms the country Bar Councils already perform all these functions effectively.

Financial literacy:

The new body will function in a way that the autonomy of the regulators is not affected in any way.

The Council would monitor macro prudential supervision of the economy, including the functioning of large conglomerates, and address inter-regulatory co-ordination issues.

It will also focus on financial literacy and financial inclusion. The announcement has become one of the most debated points of the budget. At present, there is the High Level Coordination Committee (HLCC) on capital markets, supplemented by operational co-ordination between regulators. 

The HLCC has, however, been found to be deficient, notably in preventing turf wars among regulators. There has been, for instance, a lack of clarity as to which regulator, the RBI or SEBI, will regulate the recently introduced interest rate futures that are traded on the National Stock Exchange

.

In fact, regulation of the debt market has suffered. Banks are the principal players in the debt segment and they are regulated by the RBI. SEBI, on the other hand, has a mandate to regulate financial markets.

Similar confusion over the demarcation of regulatory roles between the IRDA and SEBI exists over the popular unit linked insurance plans (ULIPs).

Over time as disintermediation of the financial sector gathers steam, there would be many more hybrid instruments that combine features of banking, insurance and the capital market.

 

So having an apex body to supervise those does make sense. But the difficulty is in creating and empowering a new body which not only acts as an umpire but does not also trample upon the autonomy of the individual regulator.

Also co-ordinating the operational aspects of the different regulators is, however, only one of the objectives in setting up a new Council.

The government would also like it to monitor prudential supervision of the economy, including the functioning of large conglomerates. Two points are relevant here.

The RBI, the oldest financial sector regulator, has already been, fulfilling nearly all the other objectives that the new Council will be entrusted with. Its quarterly credit policy statements have emphasized these as part of the monetary stance. The RBI's role in insulating the Indian economy from the global financial crisis is well known.

In fact, among central banks and other financial regulators of the developed world, the RBI's functioning is cited as something worthy of emulation. There is no case at all of diluting the RBI's role in the guise of setting up a new Council.

The second objection to a Council is that it might become ‘a super regulator' over time, especially, if, as is rumored, the Finance Minister is going to chair it. A political head for a regulator charged with maintaining financial stability is never a good idea. Besides, a super regulator will for all intents and purposes become a unified regulator.

As a general rule, a political head will be more susceptible to outside interference. The point is particularly relevant in the context of giving the proposed Council the task of supervising financial conglomerates.

Global experience:

One needs to look at the experiences of other countries with regulation. Before the crisis, the idea of a unified regulator was popular in rich countries.

In the U.K., the Bank of England was asked to surrender prudential regulation which was then merged with the unified regulator, the Financial Services Authority. That proved to be a serious handicap as the crisis unfolded. Prudential regulation of banks goes hand in hand with the central bank's role as the lender of the last resort.

Conclusion:

In recent years, some countries have set up 'super' regulators for the financial sector. In the Indian context as well, it has been suggested in some quarters that there is a need for a super regulator. As the underlying rationale for creation of a super regulator is to deal with the regulatory challenges emerging from the blurring or convergence of activities performed by providers of various financial services and the resultant overlaps, gaps, inconsistencies and uneven playing field in regulation, this paper systematically examines in detail whether and to what extent such elements are present in India. It is established that at present there are no significant regulatory overlaps/gaps, conflicts or inconsistencies. There is also no evidence of an uneven playing field amongst similar financial institutions. One significant development has been the emergence of financial conglomerates. However, their number is not very large. As such, the study argues that there is no case for a super regulator in India. Given the present institutional settings in India the institution of a super regulator could have serious ramifications for the stability of the financial system. While there is no case for a super regulator in India, the need is felt to have in place a 'lead' regulator.