Srikrishna panel wants delineation of organised trading from sector regulators

This is recommended to check the conflict of interest that may arise in financial regulatory bodies' role in policy formation and them being a regulator of financial or commodity trading

The Financial Sector Legislative Reforms Commission (FSLRC), headed by former justice BN Srikrishna may recommend delineation of organised financial trading from sector regulators.

The commission will be submitting its final report to the finance ministry soon.

According to the commission, the sector regulators will engage in micro prudential regulation, supervision and resolution of financial crisis.

According to the recommendations, a unified financial regulatory agency will be set up under which all financial agencies except RBI will be merged. This includes the Securities Exchange Board of India, Insurance Development and Regulatory Authority, Pension Reforms and Regulatory Development Authority and Forward Markets Commission.

This agency will take care of organised financial as well as commodity trading. Organised financial trading includes equities, bonds, currency derivatives (the latter being the domain of RBI), corporate bonds and commodity futures. This has been done to check the conflict of interest that may arise in financial regulatory bodies’ role in policy formation and them being a regulator of financial or commodity trading.

Further stressing the role of RBI post legislative restructuring in the interim, the commission has suggested that the RBI will perform three functions - monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and proposed micro prudential law, and regulation and supervision of payment systems.

In order to minimise the conflict of interest across these three fields and develop specialised skills, the Commission may recommend that these three major functions be performed by distinct boards which oversee the three areas of work of monetary policy, payment regulation and supervision and banking regulation and supervision.

The new financial regulatory structure will be governed under Financial Regulatory Architecture Act which will set out uniform legal process for financial regulators. Besides, it will statutorily empower independent regulators with clear goals, powers and accountability. Stressing the fact that the ultimate objective of financial regulation is consumer protection, the commission has worked out two aspects- prevention and cure. While financial regulators will address prevention, the proposed Financial Redressal Agency (FRA) spanning across financial sector will deal with cure. The FRA will be linked to all regulators so as to help the regulators to systemically address consumer grievances by appropriate regulations.

Further the report clarifies that the unified regulatory agency would benefit in terms of economies of scope and scale in financial system, reduce dependence and identification of regulatory agency in one sector and address the difficulties of finding appropriate talent in government agencies.

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