With the finance minister seeking control of financial regulators, is he prepared to pay the price in the event of a scam or crisis?
On 17th June, the United Kingdom announced that it was scrapping the Financial Services Authority (FSA), its once-acclaimed ‘light touch’ super-regulator. In less than 10 years after its creation by merging several regulators, the FSA has been written off as a failure and, by 2012, it will be replaced by three agencies—one for law enforcement and serious fraud, another for consumer protection and a third, under the Bank of England, to supervise financial institutions. At the exact time, India promulgated an ordinance, quietly and secretively, to clarify the jurisdiction of financial regulators and set up a process for settling future turf battles.
The FSA was a role model for India’s Financial Stability and Development Council (FSDC) announced in the 2010 Budget. Although the government denies it, informed sources say that FSDC was planned as a super-regulator, designed to give the finance ministry greater control over various independent regulators. The finance ministry had been at loggerheads with the then Reserve Bank governor Y Venugopal Reddy over his tough stance against liberalising banking more rapidly. That stand probably saved India’s economy from being mauled by the global economic crisis which itself was a direct consequence of failed supervision in the liberalised Western countries.
The FSDC would have given the finance ministry greater control over the RBI and Insurance Regulatory Development Authority (IRDA), which is headed by a powerful and independent-minded regulator. Why was this necessary? Because SEBI’s (Securities and Exchange Board of India) decision to abolish entry-loads on mutual funds unleashed chaos and caused investment to switch to unit-linked insurance products (ULIPs).
IRDA refused to cut distribution commissions even though finance ministry mandarins repeatedly raised the issue at the High Level Consultative Committee (HLCC) headed by the RBI governor and comprising all financial regulators. So FSDC was to cut the HLCC to size too. The ordinance retained this structure, although it diluted the FSDC from a super-regulator to a high-power committee headed by the FM. The RBI is naturally unhappy and is working hard to persuade the government to permit the HLCC to remain the coordination body for regulators. Now that the UK has scrapped the FSA and the US too has introduced a strong financial regulation reform bill just when the Indian ordinance was promulgated, better sense may prevail here too. After all, it is all very well for the finance minister to want more control over financial regulators, but if there is another scam or crisis, there will be no escaping the fact that the buck will stop with him. — Sucheta Dalal