The Hindu Business Line : Single regulator can complement finance sector reforms

Alongside speedier implementation of the remaining phases of economic reforms, the Government must also quickly create a single regulator for the financial sector.

The Government has to take an early decision for creating a single regulator for the financial sector. This will complement the speeding up of the remaining phases of economic reforms. The support given by a well-known finance guru, Dr Marti G. Subrahmanyam (Business Line, October 1) for a single regulator for the financial services sector is welcome.

Dr Subrahmanyam favours appointing a committee to look into how to move away from today's "patchwork of regulations" towards an "optimal regulatory structure". The "multiple regulatory system as exists," he says, "would make it difficult for the market participants."

Walls within the financial sector have fallen and, increasingly, companies will offer a variety of financial services under one roof. In The Future of Global Financial Services - Global Dimensions in Business, Dr Robert Grosse (Blackwell Publishing, 2004) has dealt with this aspect. He foresees tough competition between the various branches of the financial sector and ominously predicts that laggards face the prospect of extinction.

Advanced information technology, innovative new products taking care of consumers' complex financial needs, and evolving a suitable and competitive system of distribution of services will be the hallmark of the financial environment.

In these circumstances, providing a suitable and effective regulatory structure for the emerging financial services industry assumes urgency. Needless to add, a restructuring of the current multiple regulatory structures will, in itself, contribute to a faster growth in number and business volume of the financial conglomerates.

Debates in the past

This issue has been discussed at various levels from time to time in the past decade. Every time a market misdemeanour occurred, the issue of creating a single regulator would come to the fore and recede into the background soon enough. The suggestions for the regulatory reform would range from a single regulator for the financial sector to a lead regulator or a high-level coordinating body, meeting frequently, with a part-time secretariat provided by the Reserve Bank of India. The debate consequent on the collapse of a few urban cooperative banks also brought in its wake a suggestion for creating a separate regulator for the cooperative banking sector.

Unlike in the case of pursuing economic reforms further, which would involve obtaining a political consensus, the issue of setting up of a single regulator for the financial sector may not encounter any hurdles except perhaps the reluctance of the various regulators to meld into one large entity.

No political obstacles

Two examples of the way governments handled much larger issues need mention in this context. One is the way the government handled the issue of reforms in the insurance sector in the early 1990s. It set up a committee in April 1993, under the chairmanship of a former RBI Governor , Mr R.N. Malhotra, to examine the issues relating to opening up the insurance sector. This committee reported within a year, recommending the opening of the sector.

Their report was thrown open for public debate. It was much later that the government could actually legislate the opening up of the insurance sector, after an extended debate to soften political opposition to such reform.

The step-by-step exercise — a brief ministerial announcement on appointing a committee, this panel submitting a report within a year, the ensuing debate and the eventual decision — was truly a democratic exercise even if it was time-consuming. The second is the way the British government handled the issue of the setting up of a single regulator — the Financial Services Authority. The UK's Chancellor of Exchequer, Mr Gordon Brown, announced in a budget speech the government's intention of taking the supervision of the banking sector away from the Bank of England and creating a unitary regulator for the various branches of the financial sector.

This was quickly followed by the publication of a consultation paper in which the government's idea of the regulatory set-up was briefly mentioned and the issue was thrown open for a public debate. Three months were given for eliciting public and expert opinion on the proposed regulatory set-up and the time was extended by another three months.

This was followed by the issue of a draft Bill, which also went through a public debate process. Finally, the government tabled a Bill in Parliament, which again went through the rigorous parliamentary process, such as the formation of the select committee, and thus was born the unitary regulator, the FSA.

The fact that 2000 amendments were moved in Parliament shows the depth of the parliamentary debate and interest in regulatory issues. The long and democratic process with which the far-reaching issue of a radical regulatory reform was handled by Britain could be a lesson for New Delhi.

Consider panel's suggestion

It is in this light that the views of Dr Subrahmanyam would need to be considered seriously by the authorities. The expert committee should consist of economists, senior representatives drawn from each of the regulators, and officials of the ministries of finance, law, company law and commerce who have had experience in drafting laws for the setting up regulatory mechanisms. The views of such a panel should facilitate decision-making by the government and lead to the enactment of a law.

A committee such as the one envisaged by Dr Subrahmanyam will be the best forum for reviewing the current regulatory structures, the pattern of growth in the various branches of financial services and their outlook on the future of these services, the regulatory structures obtaining in various countries, and suggest an appropriate structure for the financial services industry.

Needless to add, the RBI will have to play a pivotal role in this exercise.

(The author is a former Executive Director of LIC.)

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