The financial legislative framework is set to change with sweeping changes to be recommended by Justice (retd) BN Srikrishna chaired Financial Sector Legislative Reforms Commission (FSLRC).
Despite vehement opposition from various financial regulators, FSLRC proposes a unified regulator for the rest of the financial sector barring the Reserve Bank of India, which will work as the monetary authority, banking and payment sector regulator in the interim.
While this set-up could be the transition, over a period of five to ten years, the architecture could be relooked with two possibilities. First, a single unified financial regulatory agency which would combine the role of RBI along with other regulatory entities. Another far-reaching option is to bring all financial agencies under two broad agency structures - Consumer Protection Agency, which enforces consumer protection law across the entire financial system and second Prudential Regulation Agency for micro prudential regulation law across the financial system. In either option, RBI will continue to concentrate on monetary policy.
The commission is expected to submit its final report shortly to the finance minister.
For working out the transition issues, the commission is of the view that a dedicated unit should be set up in the ministry of finance to reorganise the regulatory set-up first and then to tackle the legislative structure over the next 12-24 months.
The new financial regulatory structure will be governed under Financial Regulatory Architecture Act, which will set out the work allocation across different agencies. Under this framework, changes in work allocation will not require changes to underlying laws.
The proposed regulatory architecture has brought down the eight agencies in the present financial framework to seven by merging Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Reforms Regulatory and Development authority (PFRDA) and Forward Markets Commission (FMC) into one body - Unified Financial Regulatory Agency. The commission recommends converting Deposit Insurance and Credit Guarantee Corporation into a new body called Resolution Corporation and Securities Appellate Tribunal to be changed to Financial Securities Appellate Tribunal, which will hear appeals against all financial regulatory agencies including RBI. The commission recommends Financial Stability and Development Council (FSDC) to continue as it is. Two new entities have been proposed - Debt Management Office, carved out of RBI and Financial Redressal Agency (FRA).
The commission was set up to review 60-odd Acts governing the financial system in line with contemporary needs - RBI Act, SEBI Act, IRDA Act, FCRA Act, SCRA Act, FEMA besides the interplay of jurisdictions of various regulators.
The legislative framework needs to be revisited with three new objectives - consumer protection, micro prudential regulation and resolution to deal with financial firm failure.
The commission wants the new legislative framework to focus on nine areas - consumer protection, micro prudential regulation, resolution, capital controls, systemic risk, development, monetary policy, debt management, foundations of contracts and property. Accordingly, the commission will also recommend changes to the existing competition law to address inter-linkages between competition law and financial regulation.
According to the Commission, the first objective of the financial regulation is consumer protection and the present body of financial law is not perceptive to that fully. Thus, FSLRC recommends a unified consumer protection law which will be administered by Financial Redressal Agency where consumers across financial activity will be able to file complaints.
Interlinked with consumer protection is reducing the probability of failure of financial firms. For this, regulators will be guided by single micro prudential law which will eliminate regulatory arbitrage. While the regulators will have the powers to impose requirements of capital adequacy, corporate governance, liquidity norms, investment norms etc, it will not be uniform. The regulatory intervention will be in proportion to the risks faced and the size of the financial institutions.
Specifying the fact that the Indian financial system needs a specialised resolution mechanism, the FSLRC has proposed a unified resolution corporation which will attract both private and public sector financial arms and not just bank deposits. The primary work of this corporation will be to stop the financial firm much before it goes bankrupt.
On capital controls, the commission is in favour of temporary controls based on economic conditions rather than opting for permanent decontrol. It has proposed laws to make RBI accountable for monetary policy which gets nullified while justifying the development objectives. “Thus the monetary policy law will emphasise issues of independence, enumerated objectives, enumerated powers and accountability,” stated the report.