In his budget speech, the Finance Minister announced the setting up of the Financial Stability and Development Council. This wasn't exactly a surprise - news of the setting up of a financial super-regulator has been doing the rounds for many months now. The idea that has been doing the rounds is that having separate regulators for different kinds of financial products and services has created many anomalies because the entities that are being regulated have businesses that overlap different regulators.
The Reserve Bank of India (RBI) does banks, but many banks own mutual funds, insurance companies and brokerages. The banks actively market these services using their banking networks and actively divert banking customers to these more profitable services. This happens when many customers walk into a bank to make a deposit and walk out with a fund or a unit-linked insurance plan (ULIP) run by a company whose name sounds like the bank's name. Similarly, investment products are offered by insurance companies, mutual funds, brokerages and some other kinds of entities as well. On top of that, the last few weeks have seen a full blown argument between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) on whether some ULIPs are actually investment products disguised as insurance products.
The original idea behind the super-regulator was to sort out these kinds of issues. However, from what was said in the Budget, I'm not sure whether this goal would actually be met by the new body. Here's the gist of what the Finance Minister said in his speech: With a view to strengthen and institutionalise the mechanism for maintaining financial stability, Government has decided to setup an apex-level Financial Stability and Development Council. Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.
My take on this? The highest likelihood is that this council will be a toothless talk-shop and the actual regulators will stoutly resist any attempts of this body to second-guess them. The phrase 'without prejudice to the autonomy of the regulators' ensures this. In any case, the name alone dooms this new body to irrelevance. Everyone in government understands that if a body has a 'council' in its name, then it can't actually do anything. You need to be a 'board' or an 'authority' or even a 'department' to have some muscle.
Which is a pity, because there's a lot of problems that only a real super-regulator - one that could actually rap mere regulators on the knuckles - could have fixed. I just hope that when this council is actually constituted, it's given more powers than was indicated in the Budget speech.
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