Government of India Volume I: Analysis and Recommendations

INTRODUCTION
The Commission has understood that the world has learnt the lessons of financial instability
and therefore provided for an effective and continuous mechanism for addressing
issues of systemic risk, as well as, the need for addressing failures of individual entities
through resolution. The messages coming clear and loud from the financial crisis on the
need for more closely and effectively regulating the market, emphasis on systemic risk,
and an effective resolution framework have been factored into the recommendations of
the Commission.
1.5.5. Regulatory developments elsewhere
Following the financial crisis of 2008, there have been several efforts in some jurisdictions
for strengthening, and in a few cases, recasting regulatory structures. These are
particularly pronounced in the case of the US and the UK, while other jurisdictions are
contemplating limited changes in strengthening the weaker links in their structures. The
Commission had extensive interaction with the officials and experts on the changes being
made in the UK, Canada, Australia, Singapore and limited dialogue with agencies such as
the US Fed and Indo-US Business Council. The most radical changes are being contemplated
in the UK, where the super regulator, Financial Services Authority (FSA), has been
divided and the mandate relating to prudential regulation transferred to the Bank of England
as its subsidiary and converting the FSA into a Financial Conduct Authority (FCA). Our
understanding of the reasons for this change was that FSA’s focus on the market conduct
dimensions at the cost of relative neglect of the prudential dimension led to building up
of risks for the banking sector, which was not observed in time. In the case of Australia, on
the other hand, prudential regulation and conduct regulation had been divided and mandated
to two distinct agencies (Australian Prudential Regulatory Authority and the Australian
Securities Investment Commission) in their twin-peak model which was adopted
in the mid 90’s. This model withstood the crisis relatively better. Similarly, in Canada, prudential
regulation and conduct regulation has been placed in two different agencies, the
Office of the Superintendent of Financial Institutions as well as the Financial Consumer
Agency. While the importance of treating prudential and conduct regulation distinctly in
these jurisdictions has been well understood, the Commission has not recommended a
similar approach in the Indian context because of the reason that the required regulatory
expertise is not yet available. Hence, the recommendation for the same regulator dealing
with both prudential and market conduct aspects for the medium run, while in the
long run this could be modified depending on the experiences gained within this country
and elsewhere. The legal and statutory framework also tries to provide for easy changes
in regulatory mandate so that changes in functions would involve only limited statutory
changes.
1.5.6. Global co-ordination in the emerging context
Along with financial globalisation, complexities of financial regulation have also increased.
This became more complex after the crisis and following the adoption of greater scrutiny
of the concerns arising from terrorism-related financial activities. The new obligations
under the Financial Action Task Force (FATF) and Combating the Financing of Terrorism
(CFT) regimes have necessitated co-ordination between domestic financial regulators
amongst all the jurisdictions and between the global co-ordinating institutions. Greater
co-ordination has also become imperative in the context of concerns on financial stability.
The Commission is fully aware of the onus that these additional tasks would bring
upon domestic regulatory authorities as well as the enabling legal framework.
1.5.7. Harmonisation of laws
All the factors outlined in the previous sub-sections necessitate the need to redraft our
legislations and harmonise them. Our laws have been built up over a century and have
8 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION