Another turf war on the cards

A turf war seems to have surfaced again in the financial sector, this time not among the regulators, but rather between the regulators, on the one hand, and the government, on the other.

Last time, the dispute was over the regulatory jurisdiction of SEBI and IRDA over some products or services, which led to the passing of the Securities and Insurance Laws (Amendment and Validation) Act, 2010. Now, the RBI and SEBI have raised discordant voices against the government over the scope of activities under the newly formed Financial Stability and Development Council (FSDC).

ROLE OF FSDC

The FSDC was announced in the last Budget with the objective of strengthening and institutionalising the mechanism for maintaining financial stability.

As the Budget called it an apex body, there was a controversy over whether the FSDC would become a super-regulator. The Finance Minister, on several occasions, clarified that it would not be a super-regulator.

But, according to media reports, SEBI and the central bank have taken objection to the inclusion of financial sector reforms as one of the activities of the FSDC, as they fear it would erode the independence of regulators.

The notification says that the FSDC was formed in consultation with the financial sector regulators. In that case, the Government has apparently overridden the objections that might have been raised at the consultation stage.

The objection seems to have come only from the banking and securities market regulators. Perhaps, the other two regulators feel that the insurance and pension reforms may be left to the FSDC, without loss of independence.

The notification talks only about financial sector development and not about financial sector reforms. Are reforms and development one and the same?

Assuming that they are, does inclusion of reforms as a separate function of the FSDC nullify the regulators' independence? The issue may be slightly different. As all regulators are members of the FSDC, perhaps one regulator does not want another to interfere with the reforms coming under its jurisdiction.

For instance, the RBI may not like SEBI to be involved in banking sector reforms and the SEBI may not want the RBI to intervene in securities market reforms. Insurance and pensions are exceptions. What should really be gratifying to all regulators is that the government notification makes no mention of ‘financial sector regulation'.

Apart from financial sector development that has been disputed, the notification talks about financial stability, financial literacy, financial inclusion, inter-regulatory coordination and coordination of international interface with multilateral bodies.

But there is another item that has been carefully worded, namely ‘macro-prudential supervision of the economy, including the functioning of large financial conglomerates'.

This may, however, be viewed as closely related to the stability role, as it is the supervision of the economy as a whole at the macro level, and not with reference to institutions or markets at the micro level. The serious regulatory gap in respect of conglomerates, and the regulatory arbitrage opportunities this gap could create, seems to justify the inclusion of functioning of conglomerates within the purview of the FSDC.

Hence, one may surmise that the government is not interested in interfering with regulatory independence.

REFORMS AND DEVELOPMENT

It is not really clear how inclusion of financial sector reforms or development would interfere with regulatory independence. In many cases, it is observed that reforms require inter-regulatory coordination.

As far as institutions and markets are concerned, there are several areas of regulatory overlap; any institutional or market reform would benefit from synergy, if regulators were to put their heads together on such issues.

For orderly development and smooth evolution of regulatory practices, FSDC's role as an agent of financial sector development seems well intended. Above all, development is basically a government function.

All regulatory bodies have been enjoined with the statutory responsibility of developing the respective markets and institutions within their jurisdictions. But financial sector development in a holistic sense is the joint responsibility of all regulators, in coordination with the government.

AREAS OF CONCERN

The real threat lies elsewhere. There are several areas where the regulatory independence is weak: First, the appointment of heads of regulatory bodies, their tenure, and conditions for removal; second, overriding powers over the governing body of regulators; third, policy override by the government and the scope for direct or indirect interventions on operational issues, such as regulatory action and monetary or supervisory action.

On these matters, the government should demonstrate that it does not interfere with the regulators. If the Commerce Ministry sends a letter to the Finance Minister regarding policy changes on interest rates, the Finance Ministry should clarify, in unequivocal terms, that it is the policy responsibility of the Reserve Bank of India.

The regulators' independence is suppressed on budgetary or financial matters, or even on matters of staff regulation. These areas should be strongly taken up with the government and the necessary legislative and institutional changes brought about by all the regulators, in a spirit of cooperation.