Turf wars are distinct from informed debates. The episode between the two regulators, the Insurance Regulatory and Development Authority (Irda) and the Securities and Exchange Board of India (Sebi), on the unit-linked insurance policies (Ulips) issue was in large part a turf war but in essence also one of differing perceptions. The end of such turf wars is not to be celebrated with congratulations and jubilations, but with a sigh of relief and a few lessons learnt. First of the lessons is that such disputes must not be allowed to brew so long that it turns toxic and necessitates a remedial action through the court. It is alright to say that settlement of regulatory disputes through courts helps establish the jurisprudence. It may even be argued that one salutary outcome of the unseeming publicity of the dispute is that changes are now being made in Ulips to benefit those who invest in the instrument. But these ends could well have been achieved through deliberations and a structured mechanism for settling disputes in an atmosphere of respect, candour and trust. Collaboration and cooperation are generally believed to result in the most efficient outcomes in most situations. The second lesson is that such disputes in the financial market tend to undermine the confidence of market players on regulators. In fact, Sebi’s precipitate action caused avoidable confusion that necessitated to an extent governmental intervention. Heavens would not have fallen if Sebi had been a little more patient with Irda. Regulated industries might begin to wonder if regulators themselves do not believe in a structured mechanism to settle their own disputes, would they have the ability to determine regulatory infringements of market players?
The government helped by finally stepping in to resolve matters by issuing an ordinance to clarify that the life insurance business shall include Ulips or scrips or any such instruments. But this has raised a bigger question: Would the government always step in to resolve every such dispute? Developments in the finance ministry are indicative of the fact that such may well be the state of play in near future. This would be disturbing, for two reasons. One, it would then tantamount to an honest admission that the non-statutory mechanism of the high-level committee on capital and financial markets (HLCCFM) which worked so well for so long is no longer doing its job well enough. If regulatory coordination is not happening now, then the reasons would warrant an inquiry. Two, whether the government, by this intervention, is building a much larger case for setting up a statutory coordinating agency which finds mention in the finance minister’s last Budget Speech. That would be another way of saying that statutory regulators and the regulatory process in India are still to mature and hence require the government to hold hands for some more time — a sad commentary on the state of regulations.
The test of the efficiency of financial regulation is its contribution to capital formation. This should remain the focus of all financial regulators. The savings of those who invest in financial instruments in the securities market and of those who invest in insurance products are equally sacred. It’s the protection of their savings and their rights which should be the uppermost in the minds of the regulators. Size of the industry, commission rates and lobbying powers should not play a decisive role in the public choice of the type of regulatory architecture. This is the fourth lesson.