Financial sector regulators are usually armed with draconian powers so that they can deal effectively and quickly with crisis situations, and because they have to protect the interests of millions of retail customers who depend on the safety and reliability of the financial system. Such sweeping powers should be used carefully, and with restraint. The stock market regulator, the Securities and Exchange Board of India (Sebi), has failed on this elementary count. Its order on Friday evening, asking over a dozen private insurance companies to instantly put a stop to the bulk of their business, relating to the selling of unit-linked insurance plans (Ulips), was a hasty and thoughtless act, unworthy of a serious regulator in a market economy. It created a crisis where there was none, it introduced financial uncertainty where there was none, and through its unilateral action, it has provoked direct conflict with another regulator when civil dialogue should have been the preferred option for resolving differences. In the process, it forced the insurance regulator, Irda, to issue a conflicting order that correctly sought to reassure nervous policyholders and investors. Insurance companies got needlessly caught in a conflict between regulators. Sebi may well have a valid claim on turf, but then again it may not. Either way, is this any way for a regulator to handle a dispute over turf?
Besides, why were some companies picked out for peremptory action, and others left out — a selectiveness that suggests arbitrariness? It has been reported that investigations into the latter group of companies is continuing. But since the turf battle revolves around interpretation of the law, where is there the question of any investigation? Indeed, it is Sebi that created the problem in the first place by scrapping last year the front-loading of embedded commissions on mutual fund schemes, without simultaneously addressing the issue of such commissions in all insurance policies (including Ulips). Having created an imbalance of incentives, it seems to have decided to address the problem through peremptory action.
The failure is not Sebi’s alone. The finance ministry and the high-level coordination committee (HLCC) are equally to blame for sitting idly by while the two regulators were putting forward their different perspectives on who should regulate Ulips and the insurance companies that issued them. The finance ministry has now claimed that it is not interfering in the functioning of independent regulators by asking them to, in fact, settle the issue of their individual jurisdiction in a court of law, but greater clarity on the part of the executive on regulatory turf would have avoided getting courts involved in this matter. Some observers see in the finance ministry’s response a devious strategy to make a case in favour of the proposed financial stability and development council (FSDC). It is curious that the ministry did not have even a concept paper on the subject at the time this Budget promise was made; nor has the finance minister chosen to act on the other major recommendations of the Raghuram Rajan Committee. While recognising that opinion on the wisdom of an FSDC is divided, it is important to note that there is nothing that an FSDC without over-arching powers could have done to prevent an inter-regulatory scrap that the finance ministry or the HLCC could not have done; hopefully, it is no one’s case that the FSDC should, in fact, have over-arching powers.