The final report of the Financial Sector Legislative Reforms Commission has evoked strong responses

The final report of the Financial Sector Legislative Reforms Commission (FSLRC), which was given a wide mandate to draw a blueprint for new financial regulatory architecture, has evoked strong responses. While some have called it a potential game changer, others find its recommendations out of touch with Indian reality. The FSLRC had to grapple with several dissenting views even among its members. Besides, any radical overhaul of existing regulatory infrastructure will naturally take time. The most discussed proposal is the one to set up a new regulatory entity, the Unified Financial Regulatory Agency (UFRA), to be solely responsible for the oversight of the securities market, insurance, pensions and commodities, in effect taking over the functions of existing regulators including the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority. That would result in the financial sector having just two main regulators, the Reserve Bank of India and the proposed UFRA. Both are expected to coordinate their activities, preferably through an MOU. If that is not new — after all, regulators have to work in unison for better results — the recommendation that the principal regulators should be board driven and not follow the “top down” approach that they are used to has caused some consternation.

A key recommendation to set up a monetary policy committee which, rather than the RBI Governor, will decide on policy rates is arguably the most controversial proposal. This is seen as a not so subtle attempt to clip the wings of the RBI, also because of the related move to confer powers on the government to appoint members of the committee. However, the RBI Governor will have veto powers on interest rates under certain circumstances and after making out a case in writing. The bias towards government is even more obvious in the recommendation to appoint the Finance Minister as head of the Financial Stability and Development Council. The RBI has for long resisted encroachment on what it rightly considers to be its jurisdiction. There is no denying that the FSLRC would like to vest greater accountability with the government than with regulators. In its opinion, a major overhaul of India’s regulatory system for the financial sector is due and best done on the lines suggested by it. But there is bound to be serious disagreement over the validity of a key assumption the report makes on India’s financial sector. Surely systemic failures are due more to excessive financialisation of markets than to failures of regulation, as assumed by the Commission.

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