'Multiple regulators a priority issue'

Pointing to the risk of regulatory arbitrage, the Reserve Bank of India (RBI) on Thursday said the issue of multiple regulators for non-banking entities needed addressing soon.

“Multiple regulators for non-banking financial entities (MBFCs) and an entity-based approach to regulation gives rise to possible regulatory gaps. These will need to be urgently addressed,” RBI said in its second Financial Stability Report, released on Thursday.

Because of the diverse profile of NBFCs, these entities come under multiple regulators. So, there arises a possibility of systemic risk from the various operations they undertake, including distribution of insurance products, mutual funds, investment in capital market.

While dwelling on the downside of multiple regulators, RBI said many functional activities remain unregulated.

An RBI official said it, as banking regulator, had jurisdiction over private banking, while portfolio investment schemes were a matter to be dealt by the capital market regulator.

With multiple regulators, RBI said there are chances of gaps in regulation, since a lot of activities taken up by merchant banks, portfolio managers and brokerages are not being subject to prudential regulation.

“Functional activities remain unregulated, gaps in regulation permitting surrogate raising of public funds, leveraged activities by entities like merchant banks, portfolio managers and brokerages (are) not being subject to prudential regulation,” RBI said.

Bancassurance, for instance, a form of selling insurance products through banks and NBFCs, is one function that comes under the RBI, as well as the Insurance Regulatory and Development Authority. Capital market investments by banks and NBFCs are other common instances of regulatory arbitrage. Apart from the RBI, the Securities and Exchange Board of India (Sebi) comes into the picture, too.

In the recent spat over unit-linked insurance plans, a hybrid product with elements of both insurance and investment, Sebi had issued showcause notices to insurance companies, calling it an investment product with very little element of insurance. The battle, however, was later won by the insurance regulator and had affected the sales adversely.