Time not yet ripe for super regulator

In India, there are multiple regulators - RBI, Sebi, FMC, IRDA, PFRDA and MoF. The stakeholders include brokers, firms, banks, financial institutions, foreign institutional investors, mutual fund managers, investors, exchanges, depositories, custodians, registrars, etc. To coordinate among the regulators, a High Level Coordination Committee on Financial and Capital Markets is created with RBI Governor, Sebi Chairman and MoF Finance Secretary as its members

The issue of single or super regulator for financial markets is still a matter for debate. It is once again raised by former Sebi chairman M Damodaran who negated the move of creating a super regulator, while recommending more freedom and autonomy for the regulators.

Speaking at a meeting very recently, Damodaran said, "I don't think a unified regulatory idea... is fit for us. Britain (has) already experimented with it. I am not in favour of such a super regulatory body for the financial sector and I am not in favour of any unified regulator."

In recent times, the government has come up various decisions on financial markets like merger of Forward Markets Commission (FMC) with Sebi and creation of Provident Fund Regulatory and Development Authority (PFRDA). There was a heated debate during 2003, when the PFRDA was created and was suggested that the insurance regulator can even handle the provident fund issues.

As the agencies were growing and newer financial products were being developed, there were clashes between the regulators. During 2010, the Sebi and the IRDA sparred over regulatory control on Unit Linked Insurance Products (ULIPs). Sebi had viewed that ULIP without life cover (which is minuscule) was a mutual fund, and hence its regulation fell under its list.

The IRDA argued that as ULIPs were insurance instruments, they fall under its regulatory ambit. Consequent to the public spat was the passage of a bill ‘Securities and Insurance Laws (Amendment and Validation) Bill 2010, which gave regulatory responsibility to IRDA.

Later during 2011 again, there was a clash between IRDA and PFRDA – of course, in the media. This time annuity products developed by the pension fund managers was the subject matter. IRDA Chairman took the view that all the pension schemes need to be regulated by insurance regulator, while the PFRDA is limited to National Pension Scheme.

In order to redress this kind of regulatory issues, the government created another body called Financial Stability and Development Council (FSDC). Interestingly, the clash did not come up before the council.

The consolidation of regulation of financial markets is seen in the light of four goals: a) to take advantage of economies of scale, b) to eliminate the apparent overlaps and duplication, c) to improve accountability and transparency, d) to adapt the regulatory structure to the increasing prevalence of conglomerates in the financial industry.

While Damodaran disagreed over the merger of FMC with Sebi, he supported the creation of a public debt management agency, which aims to clip RBI powers. "The RBI should not be wearing too many hats. There should be a debt management committee and which must be given to the government, and the RBI should not do too much of actions on behalf of the government," he felt.

In order to circumvent political pressure and to ensure best supervisory and risk management practices, a single regulatory system was proposed. In India, there are multiple regulators - RBI, Sebi, FMC, IRDA, PFRDA and MoF. The stakeholders include: brokers, firms, banks, financial institutions, foreign institutional investors, mutual fund managers, investors, exchanges, depositories, custodians, registrars, etc.

To coordinate among the regulators, a High Level Coordination Committee on Financial and Capital Markets created with RBI Governor, Sebi Chairman and MoF Finance Secretary as its members. Although, the super regulator system is prevalent in UK, Japan and Korea, the methodology has still not been crystallised; thus the matured financial markets like US are still continuing with multiple regulators.

The Financial Services Authority (FSA) or super regulator has certain short comings like weak enforcement. At times it may deviate from its primary responsibility of protecting consumers as the consumer groups have no representation on the FSA board.

India is still in a nascent stage of implementing financial regulations. It needs a better system of coordination between regulators and fast-track court to ensure quick resolution of conflicts, level-playing field between regulators and harmonisation of regulations across the markets.

By K V V V Charya