Government of India Volume I: Analysis and Recommendations

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14.2. Problems of the present arrangements FINANCIAL REGULATORY ARCHITECTURE At present, India has a legacy financial regulatory architecture. The present work allocation – between RBI, SEBI, IRDA, PFRDA, and FMC – was not designed; it evolved over the years, with a sequence of piecemeal decisions responding to immediate pressures from time to time. The present arrangement has gaps for which no regulator is in charge – such as the diverse kinds of ponzi schemes that periodically surface in India, which are not regulated by any of the existing agencies. It also contains overlaps where conflicts between regulators has consumed the energy of top economic policy makers and held back market development. Over the years, these problems will be exacerbated through technological and financial innovation. Financial firms will harness innovation to place their activities into the gaps, so as to avoid regulation. When there are overlaps, financial firms will undertake forum-shopping, where the most lenient regulator is chosen, and portray their activities as belonging to that favoured jurisdiction. An approach of multiple sectoral regulators that construct ‘silos’ induces economic inefficiency. At present, many activities that naturally sit together in one financial firm are forcibly spread across multiple financial firms, in order to suit the contours of the Indian financial regulatory architecture. Financial regulatory architecture should be conducive to greater economies of scale and scope in the financial system. In addition, when the true activities of a financial firm are split across many entities, each of which has oversight of a different supervisor, no single supervisor has a full picture of the risks that are present. Fragmentation of financial firms, which responds to fragmentation of financial regulation, leads to a reduced ability to understand risk. When a regulator focuses on one sector, certain unique problems of public administration tend to arise. Assisted by lobbying of financial firms, the regulator tends to share the aspirations of the regulated financial firms, such as low competition, preventing financial innovation in other sectors, high profitability, and high growth. These objectives often conflict with the core economic goals of financial regulation such as consumer protection and swift resolution. Reflecting these difficulties, the present Indian financial regulatory architecture has, over the years, been universally criticised by all expert committee reports. The Commission has analysed the recommendations for reform of financial regulatory architecture of all these expert committee reports and weighed the arguments presented by each of them. 14.3. Considerations that guide alternative architecture choices In order to analyse alternative proposals in financial regulatory architecture, the Commission established the following principles: Accountability: Accountability is best achieved when an agency has a clear purpose. The traditional Indian notion that a regulator has powers over a sector but lacks specific objectives and accountability mechanisms is unsatisfactory. Conflicts of interest: In particular, direct conflicts of interest are harmful for accountability and must be avoided. A complete picture of firms: A financial regulatory architecture that enables a comprehensive view of complex multi-product firms, and thus a full understanding of the risks that they take, is desirable. 132 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION
FINANCIAL REGULATORY ARCHITECTURE Table of Recommendations 14.2 Financial regulatory architecture envisaged by the Commission Present Proposed (1) RBI (1) RBI (2) SEBI (3) FMC (4) IRDA (2) Unified Financial Authority (UFA) (5) PFRDA (6) SAT (3) FSAT (7) DICGC (4) Resolution Corporation (5) FRA (6) Public Debt Management Agency (PDMA) (8) FSDC (7) FSDC Avoiding sectoral regulators: When a financial regulator works on a sector, there is a possibility of an alignment coming about between the goals of the sector (growth and profitability) and the goals of the regulator. The regulator then tends to advocate policy directions that are conducive for the growth of its sector, which might be at the cost of overall consumer protection. Such problems are less likely to arise when a regulatory agency works towards an economic purpose such as consumer protection across all, or at least, many sectors. Economies of scale in Government agencies: In India, there is a paucity of talent and domain expertise in Government, and constructing a large number of agencies is relatively difficult from a staffing perspective. It is efficient to place functions that require correlated skills into a single agency. Transition issues: It is useful to envision a full transition into a set of small and implementable measures. 14.4. A financial regulatory architecture suited for Indian conditions The Commission proposes the following structure, featuring seven agencies. Agency #1: The RBI, which formulates and implements monetary policy, and enforces consumer protection and micro-prudential provisions of the draft Code in the fields of banking and payment systems. Agency #2: The UFA, which enforces the consumer protection and micro-prudential provisions of the draft Code across the financial sector, other than in banking and payment systems. Agency #3: A resolution corporation, which implements the provisions on resolution of financial firms in the draft Code. Agency #4: The FSAT, which hears appeals against all financial regulatory agencies. Agency #5: The FRA, which addresses consumer complaints across the entire financial system. Agency #6: The FSDC, which will be responsible for systemic risk oversight. Agency #7: The PDMA, an independent public debt management agency. The table summarises the changes in the financial regulatory architecture that will be proposed. These changes will alter the Indian financial landscape from eight financial regulatory agencies to seven. FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 133
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Government of India _______________
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Contents Acronyms . . . . . . . . .
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CONTENTS 12 Public debt management
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ACRONYMS FSAT Financial Sector Appe
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Acknowledgement When the Ministry o
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ACKNOWLEDGEMENT appreciate the effo
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EXECUTIVE SUMMARY rience till date.
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EXECUTIVE SUMMARY out many processe
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EXECUTIVE SUMMARY can issue regulat
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EXECUTIVE SUMMARY Alongside this, i
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EXECUTIVE SUMMARY to analyse one co
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Contracts, trading and market abuse
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5. A new Financial Redressal Agency
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EXECUTIVE SUMMARY States GDP as of
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1.2. Deliberations in the Commissio
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INTRODUCTION amendments frequently
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INTRODUCTION sectoral composition o
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INTRODUCTION The Commission has und
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CHAPTER 2 The tasks of financial la
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THE TASKS OF FINANCIAL LAW This is
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THE TASKS OF FINANCIAL LAW ◮ “i
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THE TASKS OF FINANCIAL LAW 2.5. Own
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THE TASKS OF FINANCIAL LAW desirabl
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CHAPTER 3 Structure of the regulato
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STRUCTURE OF THE REGULATOR Table of
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CHAPTER 4 Functions and powers of t
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FUNCTIONS AND POWERS OF THE REGULAT
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CONSUMER PROTECTION The consumer pr
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Table of Recommendations 5.4 Princi
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CONSUMER PROTECTION using or disclo
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CONSUMER PROTECTION providers. The
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CONSUMER PROTECTION Table of Recomm
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CHAPTER 6 Micro-prudential regulati
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MICRO-PRUDENTIAL REGULATION let tha
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MICRO-PRUDENTIAL REGULATION Table o
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MICRO-PRUDENTIAL REGULATION PRINCIP
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MICRO-PRUDENTIAL REGULATION the oth
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RESOLUTION payment systems. The cor
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RESOLUTION Commensurately, the corp
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Table of Recommendations 7.3 Intera
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Table of Recommendations 7.5 Powers
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Table of Recommendations 7.7 Fundin
Page 113 and 114: CHAPTER 8 Capital controls Capital
Page 115 and 116: CAPITAL CONTROLS 2. Absence of judi
Page 117 and 118: CAPITAL CONTROLS Table of Recommend
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Page 122 and 123: Table of Recommendations 9.1 Object
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Page 126 and 127: SYSTEMIC RISK filings by financial
Page 128 and 129: SYSTEMIC RISK Table of Recommendati
Page 130 and 131: egulatory agencies. In such a situa
Page 132 and 133: FINANCIAL INCLUSION AND MARKET DEVE
Page 134 and 135: FINANCIAL INCLUSION AND MARKET DEVE
Page 136 and 137: Table of Recommendations 11.1 Objec
Page 138 and 139: Table of Recommendations 11.2 The m
Page 140 and 141: Table of Recommendations 11.3 Board
Page 143 and 144: CHAPTER 12 Public debt management 1
Page 145 and 146: PUBLIC DEBT MANAGEMENT of the publi
Page 147 and 148: PUBLIC DEBT MANAGEMENT State Govern
Page 149 and 150: PUBLIC DEBT MANAGEMENT Table of Rec
Page 151 and 152: CHAPTER 13 Foundations of contracts
Page 153 and 154: FOUNDATIONS OF CONTRACTS AND PROPER
Page 161: FOUNDATIONS OF CONTRACTS AND PROPER
Page 166 and 167: FINANCIAL REGULATORY ARCHITECTURE T
Page 168 and 169: FINANCIAL REGULATORY ARCHITECTURE w
Page 170 and 171: TRANSITION ISSUES On the functional
Page 172 and 173: TRANSITION ISSUES service providers
Page 174 and 175: SUMMARY OF RECOMMENDATIONS NOT EMBE
Page 177: CHAPTER 17 Conclusion Financial eco
Page 180 and 181: 18.2. Note of dissent by K.J. Udesh
Page 182 and 183: 18.3. Note of dissent by P.J. Nayak
Page 184 and 185: NOTES OF DISSENT A second difficult
Page 186 and 187: NOTES OF DISSENT 6. The present arr
Page 189 and 190: CHAPTER 19 Annexes 19.1. Formation
Page 191 and 192: ANNEXES 19.2. List of consultants,
Page 193 and 194: ANNEXES * Did not participate in th
Page 195 and 196: ANNEXES 19.5. Interactions with aut
Page 197 and 198: ANNEXES (c) Examine whether informa
Page 199 and 200: ANNEXES 2. General development of m
Page 201 and 202: ANNEXES 19. Role of surveyors: (a)
Page 203 and 204: ANNEXES 6. The law must provide for
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Page 207 and 208: ANNEXES 3. As shocks can spread thr
Page 209 and 210: ANNEXES 19.8.2. Terms of Reference
Page 211 and 212: ANNEXES (d) The Board of the target
Page 213 and 214: ANNEXES 2. The PDMA should adopt a
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ANNEXES 3. On the issue of co-opera
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ANNEXES 14. Regulators must look at
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ANNEXES 31. The WG recommends the m
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ANNEXES (b) Efficiency of DRT: Suit
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ANNEXES (c) Pledged shares and exem
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ANNEXES 19.11. Interactions by the
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ANNEXES 19.13. Submissions to FSLRC
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Government of India Volume I: Analysis and Recommendations

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