The move to set up the Financial Stability and Development Council (FSDC) was triggered by two major events: the global financial crisis of 2008 and the public spat between the Securities and Exchange Board of India , or SEBI, and the Insurance Regulatory and Development Authority, or IRDA, over jurisdiction over the unitlinked insurance products, or ULIPs.
The ULIP controversy reverberated through the financial markets for several months. At one point, it was taken to the courts, where it might have dragged on longer. Besides, it is unclear whether the courts have the financial knowledge and insight to find a satisfactory solution to such a problem. Earlier, the committee on financial markets, headed by the RBI Governor, had grappled unsuccessfully with the dispute, but lacked the formal authority to impose a solution.
In the end, it was left to the finance ministry to settle the matter through an ordinance, demarcating the respective jurisdictions of SEBI and IRDA. Jurisdictional issues arising among regulators are not per se unhealthy. But on this occasion, the decibel level was unusually high and there was nerve-racking uncertainty for the mutual fund and insurance industries. In the past, there was no institutionalised framework, which will now be provided by the FSDC.
The global financial crisis showed up the regulatory gaps and inadequacies in the financial sector in several countries. This was particularly evident in the case of large financial conglomerates, whose complex and varied businesses made narrow oversight approaches inadequate. The too-big-to-fail conglomerates had to be finally bailed out by the governments with taxpayer funds. The lesson learnt was that such inter-disciplinary issues warranted a more robust and consolidated approach that would effectively pull together the expertise of various regulators.
India has witnessed its share of regulatory vacuum or overlap. It was demonstrated in the instances of cooperative banks not being supervised effectively by the RBI, or by the state Registrars of Cooperatives, and the notorious collective investment schemes and chit funds that sank the savings of unsuspecting investors. The collapse of the Unit Trust of India, or UTI, is another example. There could be upcoming issues between the IRDA and the pension regulator over hybrid pension products.
The FSDC is rightly mandated to deal with matters relating to financial stability, financial sector development, inter-regulatory coordination, financial literacy, financial inclusion, macro-prudential supervision of the economy, and coordination of India's global interface with financial sector bodies.
The nature of financial products has changed over the years, and new approaches and expertise are required to deal with them. There is also need for regulatory reform and modernisation as some of our laws are grounded deep in the past. The FSDC would be an appropriate body for taking a coherent and composite view at a broad level about the nature of reforms needed. Such a body has been recommended by high-level committees headed by Deepak Parekh and Raghuram Rajan.
The RBI and SEBI had concerns that the FSDC might impinge on regulatory autonomy and flexibility and timely action. The RBI felt that the FSDC's developmental agenda might dissipate the focus on issues related to financial stability and systemic risk. The proposed mandate was not in line with the role of similar councils or commissions conceived internationally. These fears are not entirely unfounded.
The government's propensity to erode regulatory independence is widely known; some ministries are engaged in turf war with their own regulators, even frustrating the parliamentary will expressed in terms of the regulatory statute. Any such transgression by the FSDC could stymie regulatory regimes and do more harm than good. The government has sought to allay the apprehensions of financial regulators on this point. On inter-regulatory issues, it has stated that these would be taken up by the FSDC only after there is failure to resolve them at lower levels, and only if they are referred to it by a regulator.
Bodies such as the FSDC have been constituted in several countries after the financial crisis of 2008. In the US, the Financial Stability Oversight Council (FSOC) was set up with the duty to enhance the integrity, efficiency, competitiveness, and stability of the US financial markets, promote market discipline, and maintain investor-confidence.
Similar initiatives have been taken in the UK and at the EU level. The precise role and functions may vary according to the specific circumstances and requirements of each country, but the need for an empowered body for taking a comprehensive view of macro-level financial issues and coordinating regulatory responses especially in times of crises has been accepted in all major jurisdictions. The rationale for the FSDC is quite compelling.
The author is former Secretary, Government of India