Political economy of regulatory reform

News: This article discusses the status of implementation of regulatory reforms announced in the last seven budgets.

Why financial regulatory reforms are needed?

Financial regulatory reforms clarify the role and objectives of regulation, establish sound agency architecture and institutionalize sound governance and processes within a statutory regulatory authority (SRA).

For example, Securities and Exchange Board of India (Sebi) was announced in the 1991 budget speech.

Similarly, the Insurance Regulatory and Development Authority of India and the Competition Commission of India were announced in budget speeches of 1993 and 1999. There is continuation of this practice in the post-2014 budgets.

How budget announcements have focused on reforming regulatory structure?

The first category of reforms attempts to bring structural changes in the regulatory architecture or a fundamental revision of the legislative framework. These are:

1. Indian Finance Code– recommended by Financial Sector Legislative Reforms Commission (FSLRC) led by Justice B N Srikrishna. Its objective is to strengthen and modernise the legislative regulatory framework for better governance and accountability.
2. New monetary policy framework: recommended by many committees, including Raghuram Rajan, Percy Mistry and Urjit Patel committees to have a modern monetary policy framework to meet the challenge of an increasingly complex economy.
3. Merger of the Forwards Markets Commission with SEBI: recommended by the FSLRC to strengthen regulation of commodity forward markets.
4. The Insolvency and Bankruptcy Code (IBC): drafted by the T K Viswanathan committee to bring about legal certainty and speed and improve the ease of doing business.
5. Creation of a public debt management agency (PDMA): recommended by the RBI in 2001 to deepen the Indian bond market and to bring it to the same level as the world-class equity market.
6. Code on the resolution of financial firms: recommended by the FSLRC to provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities.
7. Unified financial redress agency (FRA): recommended by the FSLRC to address grievances against all financial service providers.

The second category of reforms relates to the consumers.

First, the introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

Second, the introduction of one single operating demat accounts so that consumers can access and transact all financial assets through this one account.

What is the implementation status of the above-mentioned reforms?

Creation of MPC, merger of FMC with SEBI, and the enactment of IBC, have been implemented. On IFC, there has not been much progress. However, in last year’s budget, it was proposed to consolidate the various securities markets related legislation into a rationalised single Securities Markets Code.

On KYC Identification Number, consumers today are where they were in 2014. The unified FRA is still under discussion.

What is the way forward?

First, technological and financial innovations are growing. Hence, there is a need for coherent financial regulatory architecture with an updated IFC and a unified FRA.

Second, the issue of regulatory independence and regulator versus government is now getting public attention. Hence, there is a need to continue to engage with the SRAs to work on announced reforms to bring about greater accountability.

Source: This post is based on the article “Political economy of regulatory reform” published in Business standard on 28^th Jan 2022.