A premature idea

The Reserve Bank of India's report on Currency & Finance has opened the debate on the merits of a "super-regulator" once again""and the Sebi chairman has immediately thrown cold water on the idea. Recommendations on the requirements of a super-regulator have come up intermittently since 1998. The RBI has suggested now that the idea of a super-regulator has gained validity against the backdrop of blurring distinctions between banks and financial institutions, and this super-regulator would be expected to supervise banks, securities firms and insurance companies. According to the RBI, such a super-regulator will have economies of scale, increased accountability and avoid duplication, overlaps and gaps more efficiently. There is movement elsewhere in the world also to follow the super regulator model. Besides India, countries like Indonesia and Russia are considering such an entity to regulate financial markets. The success of the UK's Financial Services Authority (FSA) has already prompted some other countries to follow its lead""Japan, Korea and Germany.

And yet, in 2002, Bimal Jalan, as RBI governor, testified to the Joint Parliamentary Committee that he was not in favour of a super-regulator, as the jurisdiction of the various regulatory bodies differed vastly. Today, there is no denying RBI's logic that banks and financial institutions are converging with the emergence of the "super-market", where the same entity has operations in banking, securities and insurance. But there are counter-arguments too. Even if some entities come under the supervision of multiple regulators, there are many more that fall under the purview of just one regulator. Providing them with a healthy environment needs a different approach; indeed, the RBI has itself pointed out that banks are regulated and supervised for prudential reasons, while mutual funds may be supervised for ensuring adequate disclosure to investors. The central bank accepts that a super-regulator may not be able to differentiate between the various risks and objectives of supervision.

Recognising these factors, the RBI has suggested an umbrella regulatory legislation to deal with the gaps and overlaps, but without disturbing the existing jurisdiction. The RBI proposes that it will continue to regulate banks, with a deputy governor as the chairman along with the chairmen of Sebi and the insurance regulatory body as members, and the RBI governor as the chairman of the apex regulatory authority. But this should not imply that the government has to write on a blank slate. There is already the concept of a lead regulator in place and, depending on the principal activity of an entity, the lead regulator coordinates with other regulators to supervise the operations of such an organisation. There is also a high-level committee, presided over by the RBI governor with the Sebi chairman and finance secretary, looking into inter-regulatory issues.

All of which still leaves the question as to whether a super-regulator is necessary in India today. Changes to the regulatory structure stem from country-specific issues. Financial scandals and collapses like the Barings failure prompted the UK's decision to set up the FSA. The Japanese super-regulator has not been effective, as the Financial Services Agency could not prevent bank failures or rogue traders threatening the financial sector. The US finds no reason yet to give up its "functional" regulators in favour of a super-regulator. In India, if there is effective coordination between the existing regulators, with the combination of lead regulator and high-level committee approaches as at present, the creation of a super-regulator could be left for the future.