The Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice (Retd) Srikrishna, submitted its final report last Friday. Its key recommendations do not deviate significantly from those made in the preliminary report, which was published a few months ago. This suggests that the weight of opinion on the main ideas was relatively favourable. The challenge now will be to amend the several pieces of existing legislation to bring about the synthesis visualised by the Commission. This process is unlikely to gain momentum until after the elections, when a new government will hopefully have the space to take it on. Meanwhile, continuing public debate will perhaps help to refine and sharpen the recommendations.
To focus on perhaps the most important dimension of the recommendation, the appeal of a unified financial sector regulator is evident from global responses to the recent financial crisis. Virtually all diagnoses of the crisis identified lack of regulatory co-ordination as one of the contributory factors. Traditional domain separation simply failed to tackle the enormous flexibility that investors around the world had acquired in the wake of liberalisation and deregulation to move money across asset classes and geographies, taking full advantage of market, tax and regulatory arbitrage opportunities in the process. For example, the US set up the Financial Stability Oversight Council in 2010, creating a formal structure of regulatory co-ordination mandated by the Dodd-Frank Act. But the moves were not all unidirectional; the UK, which had moved on regulatory integration a long time ago, establishing the Financial Services Authority in 1997, saw disadvantages in moving perhaps too far in the other direction. Its new dispensation brings banking supervision back to the Bank of England, in the form of a subsidiary entity, the Prudential Regulation Authority, while restructuring the remaining regulatory tasks within the Financial Conduct Authority, which has an explicit mandate for consumer protection with respect to all financial products and services.
The FSLRC recommendations on unification broadly follow along the lines of the revised UK framework. Bank supervision remains part of the Reserve Bank of India's mandate, based on the premise that the lender of the last resort to the banking system must always have full visibility of the risks and potential threats to that system. The integration of financial and commodity market regulators on the one hand and insurance and pension sector regulators on the other is based on the "consumer first" principle, allowing all financial services to be subject to common standards of transparency and the conduct of providers. This framework potentially allows for uniform treatment of innovation, wherever it may originate. Importantly, global movements of capital are putting pressure on countries to co-ordinate more effectively on cross-border tax and regulation issues. This suggests that domestic architectures will also converge towards a generic pattern, with integration across domains being the core element. Of course, for the potential benefits to be realised, legislation is only part of the story. Organisational structure, human capital and performance incentives are all issues that have dogged regulators in the old model; they will probably pose an even more significant challenge in this more complex scenario. As always, the battle can be won or lost in translating good intentions into workable solutions.