Subsuming all sectoral regulators into one functional agency could lead to challenges of consistency in approach
The way the government works is quite clear. There are a number of ministries that address various sectors and the minister-in-charge is appointed by the party in power. The bureaucrats who execute the mandates are civil servants who just do their job. Some ministries such as finance appear to be more important as they handle the area of funds allocations. However, while various ministries have their own aspirations and goals, the Budget subsumes all through a consultative process. Subsidies involve the agriculture, consumer affairs and petroleum ministries. Expenditure programmes involve the rural development and road transport and so on. All differences across ministries are settled once the Budget is drawn up.Now, carry this analogy to the financial sector, and the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) can be evaluated. The FSLRC reports are voluminous with a lot of work having been done in understanding the complex financial systems in the country. The final view taken, to be put succinctly, is to turn everything around from where they are. In such an approach, there can be nothing right or wrong. And there are always different models that can be quoted as supporting a view in a certain group of countries.Briefly, FSLRC looks at consolidation of regulators in the market oriented space, with RBI maintaining its own position when it comes to banking, but giving up the role of debt management. However, a new set of agencies are hence created that will have, besides RBI, a united agency (taking in Sebi, FMS, Irda and PFRDA), a new SAT (FSAT), Resolution Corporation, FRA (financial redressal agency), debt management office, and FSDC. What has been done is the creation of new agencies based on ‘functions’ rather than the existing one which is based on ‘domain’. Will this work?The idea of having separate regulatory structures was that there is a certain domain knowledge that resides in institutions that have been created like Sebi, PFRDA, Irda and FMC, which are able to better understand and develop them. For example, pensions is something new in the country and creating a regulatory structure does involve core competence through focused attention and action that cannot come from being a part of the united agency.This is similar to saying that the ministry of consumer affairs understands consumer welfare more than the ministry of agriculture, which looks at the interests of the farmers. Quite clearly, by merging agriculture and consumer affairs together, there would be a distinct conflict—is the farmer or consumer more important. In the same way, if we look at the market-oriented regulators—Sebi and FMC—the latter’s decision affects physical markets (mandis). The mindset has to be different. Sebi would typically not mind a bull run if all the rules are being obeyed as this is the market reality. However, the FMC would not be happy if the price of, say, sugar kept going up in the futures market because of market forces, because finally it does get back to the cash market where high prices may not be acceptable. Therefore, specific expertise and mindsets are necessary. Irda would be looking more on a conservative basis to develop the insurance market, while Sebi may argue for insurance companies to be bolder in the equity and debt segments so that these markets develop.Being a part of the same organisation will tend to create biases. Having all activities subsumed in a functional agency could lead to challenges of consistency in approach as a problem in insurance is different from one in pensions or securities for which special agencies are better suited to address them.An observation made in the report on the existence of regulatory arbitrage is interesting, as also the conflicts that arise due to multiple regulators overseeing the market participants. It is precisely because of the existence of separate regulators that the system becomes stronger in terms of transmission of systemic risk. A problem in, say, the securities or commodity futures market remains in the domain and does not get transmitted, which would have been the case in case of a unified field. This provides enormous resilience to the system in general.The issue on separation of the public debt management function from RBI has been debated for long. The continuation of the status quo makes sense as RBI is in the best position to handle public debt as it is fully monitoring the monetary sector. The fact that GSecs are being driven by the market forces ensures that RBI cannot influence the market in terms of pricing. Therefore, the apprehension that RBI has a basis towards low rates to support government borrowing is unfounded. Having a separate office would, in fact, make monetary management difficult as RBI will not have real-time information on public debt.Therefore, just like how ministries are not merged, the same principle should hold for the constituents of the financial sector. There can be a case for a super regulator today just like we have the PMO that oversees all the ministries whose job will be one of facilitation and coordination, with each element retaining its independence. Today, all the regulatory bodies are under the purview of the ministry of finance, except the commodity market, where the FMC has been a part of the ministry of consumer affairs. However, if the FCRA Bill is passed, and the FMC becomes an autonomous body then it can be brought under the purview of the super regulator, which could be created afresh with representation from all concerned ministries. This way, there could be better coordination between the regulators and the markets would grow in an orderly way.The present system has worked well with market players and instruments coming under multiple regulators. To iron out the differences that exist, we only need to weave the fabric closer together, and not go back to the basics and change the yarn and design.
The way the government works is quite clear. There are a number of ministries that address various sectors and the minister-in-charge is appointed by the party in power. The bureaucrats who execute the mandates are civil servants who just do their job. Some ministries such as finance appear to be more important as they handle the area of funds allocations. However, while various ministries have their own aspirations and goals, the Budget subsumes all through a consultative process. Subsidies involve the agriculture, consumer affairs and petroleum ministries. Expenditure programmes involve the rural development and road transport and so on. All differences across ministries are settled once the Budget is drawn up.Now, carry this analogy to the financial sector, and the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) can be evaluated. The FSLRC reports are voluminous with a lot of work having been done in understanding the complex financial systems in the country. The final view taken, to be put succinctly, is to turn everything around from where they are. In such an approach, there can be nothing right or wrong. And there are always different models that can be quoted as supporting a view in a certain group of countries.Briefly, FSLRC looks at consolidation of regulators in the market oriented space, with RBI maintaining its own position when it comes to banking, but giving up the role of debt management. However, a new set of agencies are hence created that will have, besides RBI, a united agency (taking in Sebi, FMS, Irda and PFRDA), a new SAT (FSAT), Resolution Corporation, FRA (financial redressal agency), debt management office, and FSDC. What has been done is the creation of new agencies based on ‘functions’ rather than the existing one which is based on ‘domain’. Will this work?The idea of having separate regulatory structures was that there is a certain domain knowledge that resides in institutions that have been created like Sebi, PFRDA, Irda and FMC, which are able to better understand and develop them. For example, pensions is something new in the country and creating a regulatory structure does involve core competence through focused attention and action that cannot come from being a part of the united agency.This is similar to saying that the ministry of consumer affairs understands consumer welfare more than the ministry of agriculture, which looks at the interests of the farmers. Quite clearly, by merging agriculture and consumer affairs together, there would be a distinct conflict—is the farmer or consumer more important. In the same way, if we look at the market-oriented regulators—Sebi and FMC—the latter’s decision affects physical markets (mandis). The mindset has to be different. Sebi would typically not mind a bull run if all the rules are being obeyed as this is the market reality. However, the FMC would not be happy if the price of, say, sugar kept going up in the futures market because of market forces, because finally it does get back to the cash market where high prices may not be acceptable. Therefore, specific expertise and mindsets are necessary. Irda would be looking more on a conservative basis to develop the insurance market, while Sebi may argue for insurance companies to be bolder in the equity and debt segments so that these markets develop.Being a part of the same organisation will tend to create biases. Having all activities subsumed in a functional agency could lead to challenges of consistency in approach as a problem in insurance is different from one in pensions or securities for which special agencies are better suited to address them.An observation made in the report on the existence of regulatory arbitrage is interesting, as also the conflicts that arise due to multiple regulators overseeing the market participants. It is precisely because of the existence of separate regulators that the system becomes stronger in terms of transmission of systemic risk. A problem in, say, the securities or commodity futures market remains in the domain and does not get transmitted, which would have been the case in case of a unified field. This provides enormous resilience to the system in general.The issue on separation of the public debt management function from RBI has been debated for long. The continuation of the status quo makes sense as RBI is in the best position to handle public debt as it is fully monitoring the monetary sector. The fact that GSecs are being driven by the market forces ensures that RBI cannot influence the market in terms of pricing. Therefore, the apprehension that RBI has a basis towards low rates to support government borrowing is unfounded. Having a separate office would, in fact, make monetary management difficult as RBI will not have real-time information on public debt.Therefore, just like how ministries are not merged, the same principle should hold for the constituents of the financial sector. There can be a case for a super regulator today just like we have the PMO that oversees all the ministries whose job will be one of facilitation and coordination, with each element retaining its independence. Today, all the regulatory bodies are under the purview of the ministry of finance, except the commodity market, where the FMC has been a part of the ministry of consumer affairs. However, if the FCRA Bill is passed, and the FMC becomes an autonomous body then it can be brought under the purview of the super regulator, which could be created afresh with representation from all concerned ministries. This way, there could be better coordination between the regulators and the markets would grow in an orderly way.The present system has worked well with market players and instruments coming under multiple regulators. To iron out the differences that exist, we only need to weave the fabric closer together, and not go back to the basics and change the yarn and design.
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