Is a unified financial regulator a good idea? - YES

The Financial Sector Legislative Reforms Commission (FSLRC) is right in opting for a single or super regulator to replace those in equity, commodities, pensions and insurance sectors. The idea is to move from sectoral regulation to a broader framework of rules and principles.

With this, the number of regulators in the financial sector is proposed to be brought down from eight to seven. While this reduction may appear nominal, the proposed clubbing of SEBI, FMC, IRDA and PFRDA is a significant step.

A multiplicity of regulatory agencies has created scope for regulatory arbitrage, apart from making it difficult to protect consumer interest. It has been observed that certain market players try to take advantage of multiple regulators by operating in grey areas not covered by regulation.

The Unified Financial Regulatory Agency (UFRA) will subsume SEBI, IRDA, PFRDA, and FMC. With banks being unique and specialised financial entities, the RBI has been kept out of the purview of the UFRA. While the RBI has evolved and matured as a regulator, the same cannot be said of the other regulatory agencies. The idea of UFRA holds promise for the orderly development of these market segments.

The FSLRC has pointed out a number of benefits of the proposed UFRA. First, by dealing with all financial transactions other than banking and payments it would help in realising regulatory economies of scale and scope.

Second, it would promote efficiency, by providing a common platform, as proposed, for organised financial trading in instruments, spanning equities, bonds, currencies and commodity futures.

Third, unification of regulation and supervision of financial firms such as mutual funds and insurance companies would yield to consistency in consumer protection and micro-prudential regulation.

The need for a UFRA has been felt in the context of confusion over the jurisdiction of different regulatory agencies over different financial products.

The 2010 spat between SEBI and IRDA on the jurisdiction over ULIP is a case in point. The inadequacies of the HLCC on financial markets in addressing the dispute was brought to fore. The UFRA is not proposed as a standalone creation, but as a part of an entirely new edifice where consumer protection has received due emphasis. The provision to create a Financial Redressal Agency (FRA) with a presence in every district, where consumers of all financial products would be able to submit complaints, is a much-needed intervention.

Consumer interest deserves special attention as problems of moral hazard are acute in the finance industry, as has been exemplified in the subprime crisis.

The desirability of the proposed UFRA should be seen along with the role of other financial regulatory agencies which address resolution of financial disputes and appeals against regulators, apart protecting consumer interest.

(The author is Acting Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)