As with other sectors, government intends to bring uniformity in the regulatory regime and has been seriously intending to come up with an umbrella regulation for the financial domain.
In this regard, the approach paper of the Financial Sector Legislative Reforms Commission (FSLRC) has proposed a new direction for financial regulation in India.
Why Umbrella Regulator?
While on one hand, half the Indian population still does not have access to finance, on the other, regulations have restricted the growth of financial services. In a country growing t such a rapid pace that the GDP doubles every 8 to 10 years, the needs of people and firms are constantly changing. In recent years, various government committees have pointed to the need for policy change. But it was found that the required changes could not be made under the existing, mostly outdated, financial laws. This prompted a review of the financial legislative framework.
FSLRC – What is it?
The FSLRC was given the job of reviewing, simplifying and modernizing the legislation that affects financial markets in India. It was asked to prepare legislation in tune with the present-day needs of finance. The commission has recently released an approach paper available on its website (http:/goo.gl/aJICQ). The paper discusses its strategy and philosophy. News reports about the commission have focused on the FSLRC recommendations for India’s financial regulatory architecture.
But this is only one of the many aspects of Indian finance that the commission was mandated to review. In its proposed recommendations, it has endorsed a transition to a modern regulatory architecture recommended by previous government reports such as the Raghuram Rajan and the Percy Mistry committee reports. These reports had described the problems in the Indian financial sector arising from regulatory cracks and overlaps. The modern approach to financial regulation allows greater innovation. It emphasizes the objectives of regulation. Regulation is needed when markets fail. The approach emphasizes that the objective of regulation is to protect consumers. This can be achieved by creating a system in which it is difficult to indulge in unfair practices or sell consumers products that are unsuitable for their specific needs. Unlike in goods and services, where there may only be small lag between payment and delivery, the lags in finance are long and often contingent on a state of nature. If consumer protection is the objective of the regulator, it must be empowered with instruments to ensure it. It should not be tasked with other objectives or with doing things “in the public interest”. It cannot prevent innovation as long as the financial firm selling the servicer is not engaged in practices which violate these objectives.
Future, the regulator must not prevent the failure of financial firms completely. Firms that are prone to take very high risks or are very weak should fail. However, firm failure must be happen at minimum cost to consumers and none to the tax payer. The owner should lose money. The FSLRC approach paper discusses the creation of a new resolution agency for handling firm failure through mergers, acquisition or a close down before the financial firm goes bankrupt. The approach paper discusses a consumer protection law which would lay out principles on the basis of which regulators would write regulation. These laws would not contain detailed regulations, which would be only written by the regulator. These laws will be separate from the regulatory agencies that enforce them. A law, such as a consumer protection or micro prudential law, can be enforced by a number of agencies, each in their sector. A single financial redressal agency would hear complaints for all sectors
Regulators in this approach will be given independence under the law. At the same time, they will be accountable. Accountability will be ensured through clearly defined objectives, avoiding conflicting objectives, a well laid out rule making process and an appeals mechanism (There would be newly created non-sectoral financial sector appellate tribunal). In this entire context the Govt also forwarded the approach paper to a panel headed by a retired judge so that the whole thing can be looked at in a more insightful manner. The panel came out with its report that seconded the thought presented in the approach paper.
As the Indian economy grows bigger, its need for finance increased. Households and firms often do not have access to the former financial sector. Until now, the approach in the formal regulated financial sector has been to give explicit permissions for some products or markets. The rest of the financial products and markets are banned. This approach has restricted innovation in financial markets. The FSLRC approach should bring about a change to the pace of innovation. At least this is what we can safely assume seeing the deftness of the approach paper and the same is being authenticated by the judicial panel. With similar moves happening in the higher education sector it becomes necessary that the domain which requires a unified and comprehensive regulation should be dealt with that way to enable a rhythmic amplification of benefits.