Putting Consumers First in Financial Sector Regulation

Mumbai, December 17, 2013

There is a need to focus on the consumer as the core purpose of all financial sector regulation. This sentiment was expressed strongly at a seminar on competition and regulation reforms in financial sector in India, organised by CUTS International here on 16th December.

The seminar was organised by CUTS International as a part of outreach events being organised for the India Competition and Regulation Report, 2013, due to be published in 2014.

The India Competition and Regulation Report, a biennial report being published since 2007, is being undertaken by CUTS International with the support from Norwegian Ministry of Foreign Affairs.

The reports review the state of regulation and competition in economy in general and certain sectors in particular. The 2013 report covers the sectors of finance, coal, railways and private healthcare. In addition, the cross cutting areas include regulatory independence, regulatory conflict, and impact of regulatory uncertainty on investments.

Amol Kulkarni, Policy Analyst, CUTS International, presented the paper on regulation and competition in Indian financial sector, and touched upon the issues of excessive regulation, uneven playing field, regulatory preference to public sector entities, regulatory arbitrage and consumer protection in the financial sector. In addition, the paper attempts to analyse the regulatory changes in India and other jurisdictions from the perspective of post-crisis regulation.

Ms. Sucheta Dalal, renowned journalist stressed that consumers are being taken for granted in all regulatory matters. Issues of regulatory arbitrage and multiplicity of regulators, including regulation of similar products (such as mutual funds and pension funds) by separate regulators, were raised by Mr. Somasekhar Sundaresan, Partner, J. S. Associates.

Mr. Mehta added that primary reason for regulatory conflicts was absence of co-ordination between heads of regulatory agencies. These regulatory agencies could be the financial regulatory agencies or the sectoral agencies and the Competition Commission of India.

As the regulatory agencies are manned by retired civil servants, the differences in individual thought processes result in regulatory non-cooperation and conflicts. This regulatory capture by the institution of post-retirement sinecures was identified as one of the reasons for regulatory turf wars and inappropriate regulation.

In addition, the concern that the regulators were not being held accountable in spite of ineffective supervision and failure of timely action, emphasised Ms. Dalal.

Prof. Charan Singh, RBI Chair Professor of Finance, IIM Bangalore, added that lack of domestic research and studies based in the country, and probably an over emphasis on foreign research, results in lack of effective policy making.

Mr. Prithvi Haldea, Chairman and Managing Director, Prime Database Group, added that lack of adequate data collection, analysis, and interpretation mechanism that could feed in policy and regulation making is resulting in sub-optimal regulation.

Mr Haldea also emphasised on the lack of regulatory predictability, and focus on quantitative in place of qualitative norms, being areas of concern in financial regulation. One of the examples that were cited was absence of qualitative criteria for appointment of independent directors..

The panel discussion was followed by a lively question and answer session between the audience and panellist. The audience for the seminar comprised a mix of financial professionals, lawyers, economists, academia, civil society, such as Mr. Nishith Desai, a leading taxation lawyer.

While interacting with the audience, the panel emphasised that the product-based regulation as opposed to activity based regulation is resulting in regulatory cracks in the financial system and regulation by a unified regulator of similar products, as suggested by the Financial Sector Legislative Reforms Commission, could be the apt solution to deal with the problem. The issues of excessive regulation of the sector resulting in harm to genuine market players, were also discussed during the interactive session.

Mr. Mehta delivered the closing remarks for the seminar, while highlighting the practice that regulators are beholden to the line ministries and not to the Parliament, a culture that needs to change. The Planning Commission in a recent draft Regulatory Reform Bill has prescribed such a procedure.

He also emphasised on the need for democratisation of the regulatory appointment process and ensuring proper credentials for appointees and validation of appointments by the Parliament.

For more information, please contact:

Amol Kulkarni, Policy Analyst, CUTS, +91-099296-42313, amk@cuts.org