Regulating the Regulators

Regulating the regulators appears to be the new mantra that the Central Government is pushing forward in its effort to exercise greater control over the country’s stock mart, insurance, commodities market and pension funds. What, however, is unclear is how does it hope to empower this single regulator.

It was on October 1 that the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B N Srikrishna, released an approach paper proposing a single regulator called the Unified Financial Agency (UFA) for the financial sector, which would subsume the functions of existing regulators like the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, the Pension Fund Regulatory and Development Authority and the Forward Markets Commission (FMC). 

However, while the approach paper clearly outlines the need for greater accountability for the regulatory process, there is little it talks about how such autonomy will flow to the system. The approach paper has suggested the need for a single regulator on the grounds that it would help achieve competitive neutrality as the boundaries between products and institutions are disappearing. More importantly, it argues that this would improve the accountability of regulation. 

But as global experience shows, the idea of a single regulator is yet to pick up pace, with only two major economies – the UK and Japan—being among the 15-odd countries that have one. Domain experts say that a single regulator might not be able to differentiate between different types of institutions and products. Also, creating a regulatory monopoly could see it functioning in a more rigid and bureaucratic manner, resulting in diseconomies of scale. And, scale is certainly a problem in the Indian regulatory landscape as there is little connect between the existing regulatory agencies and the public at large. Thus, there is little regulatory presence in centres other than the four metros and neither is there an effective IT infrastructure that can enable one to do away with physical presence.

Also, creating a unified regulatory agency will require new legislation, leading to the possibility that the process may be exploited by special interests. It was tackle the emergence of special interests that the Deepak Parekh Advisory Group on Securities Market Regulation (2001) recommended that a system needs to be devised to allow designated functionaries to share specified market information on a routine and automatic basis. Such a system can be devised for the different regulatory bodies we have and avoid the need for creating an entirely new system that as the Srikrishna Committee noted would take at least 10 years to set up.<.

The issue of choosing between single and multiple regulators in India was raised for the first time by  Y V Reddy in May 2001. However, even he did not recommend a super regulator, preferring instead to opt for an umbrella regulatory legislation, which creates an apex regulatory authority, without disturbing the jurisdiction of the existing regulators. What he appeared to favour was regulatory co-ordination rather than unified supervision. Regulation in India is by and large on institutional lines and institutions essentially report to a single regulator.

The issue on hand is who should regulate companies or products that fall between two sectors or fall under more than one sector?  There is feeling among industry players that a unified approach will never work in India as it will create more bureaucratic hurdles. In fact, some even point out that it may become yet another place for retiring bureaucrats and civil servants to park themselves. They also point to the fact that the concerns over ‘regulatory arbitrage’, where institutions create products that fall outside the purview of any single regulator can best be tackled by ensuring that the relevant product is regulated under the industry it falls in and not the sector that its introducer is in. Thus, a mutual fund is performing bank-like functions then it must be subject to the same kind of regulation. And, if there is a product that comes under multiple sectors, an umbrella regulatory body could do the needful.

The present regulatory architecture consists of multiple regulators for banks, pensions, insurance, commodities and securities. Proponents of the single regulatory body argue that as more complex products and services are introduced, a single agency can help prevent any turf war between different regulatory bodies.  But, the moot point here is do we have the necessary skill-set to have one super regulator.

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