Proposed super regulator needs teeth

In his budget speech, the finance minister announced the setting up of the Financial Stability and Development Council to serve as a financial super-regulator. The idea is that having separate regulators for different kinds of financial products and services has created many anomalies because the regulated entities have businesses that overlap different regulators, writes Dhirendra Kumar.

In his budget speech, the finance minister announced the setting up of the Financial Stability and Development Council to serve as a financial super-regulator. The idea is that having separate regulators for different kinds of financial products and services has created many anomalies because the regulated entities have businesses that overlap different regulators.

HT Image

The Reserve Bank of India does banks, but many banks own mutual funds, insurance companies and brokerages. The banks market these services using their banking networks and divert banking customers to these more profitable services. Many customers have little idea when they walk into a bank to make a deposit and walk out with a fund or a ULIP run by a company whose name sounds like the bank’s name.

From what was said in the budget, I’m not sure whether the new body would be able to regulate the diverse players.

Here’s what the FM said in his speech: “With a view to strengthen and institutionalise the mechanism for maintaining financial stability, Government has decided to set up an apex-level Financial Stability and Development Council. Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision... including the functioning of large financial conglomerates, and address inter-regulatory coordination issues.

The phrase “without prejudice to the autonomy of the regulators” ensures that this council will be a toothless talk-shop and the actual regulators will stoutly resist any attempts of this body to second guess them. Everyone in government understands that if a body has ‘council’ in its name, then it can’t actually do anything. You need to be a ‘board’ or an ‘authority’ or even a ‘department’ to have some muscle.

Which is a pity because there are a lot of problems that only a super-regulator with real powers could have fixed.