The Srikrishna Commission’s report moots a unified regulator and other deep changes, but falls short on banks...
01-Apr-2013 •Dhirendra Kumar
Last week, the Financial Sector Legislative Reforms Commission (FSLRC) came out with its report. Back in March 2011, this commission had been tasked with examining the regulatory structure and the laws governing the financial sector. The 10-member committee had a broad mandate covering all financial services as well as everything currently overseen by any financial regulator. The commission’s final recommendations have hewed closely to the approach paper that it had published in 2012.
Broadly, the commission has recommended what can be called a changeover from an area-based division of regulators to a task-based division. Today, each agency like the SEBI or the IRDA or the FMC looks after one type of financial service or or one area. In the FSLRC’s recommendations, this would be replaced by a horizontal structure whereby the basic regulatory and monitoring functions of all areas would be done by a Unified Financial Agency (UFA). All consumer complaints, regardless of the area will be handled by a Financial Redressal Agency (FRA). There will be a single tribunal, the Financial Sector Appellate Tribunal (FSAT) which will hear appeals regarding the entire sector. There are also three other agencies in the recommendations, along with the Reserve Bank of India which will continue to oversee banking.
This new horizontal structure serves the interests of the consumers of financial services (be they individuals or businesses) much better. For one, it should eliminate regulatory arbitrage. The IRDA-vs-SEBI spat on ULIPs happened because the two agencies’ views on the characteristics of investment products were very different. Another advantage of the horizontal structure would be that consumer complaints about a sector would get separated from the regulator. This is important because a certain class of consumer complaints have mistakes or oversights by the regulator at their root. Recognising this root cause means admitting to its own flaw, something that is hard for any organisation.
Of course, just merging existing setups under a single banner may not actually eliminate the regulatory arbitrage, as would be obvious to anyone who is familiar with the gap between theory and practice of government functioning. SEBI, IRDA, FMC and PFRDA etc could easily continue operating as isolated departments of a nominally unified financial regulator.
However, as far as consumer protection goes, there are some bigger potential problems in the commissions’ recommendations. In recent years, banks have been a major source of grief for consumers. Overcharging for services, rampant mis-selling of financial products, malpractices in consumer loan recovery are only some of problems that a large number of customers face. The Reserve Bank of India wears a wide variety of hats. Of these, the one under which consumer protection falls is the most ill-fitting. Specifically about mis-selling of insurance and investment products, there has never been even hint of realisation that banks are a major perpetrators of these practices. Unfortunately, this is the area where the commissions’ recommendations depart the least from the current arrangement.
True, there will be a separate FRA which will presumably hear complaints about banks. However, many of the malpractices are built into very structure of the business. Banks exploit the trust that the word ‘bank’ brings and exploit it to sell a variety of other products. Customers implicitly believe that what a bank salesman tells them about an insurance policy or a mutual fund has as much veracity as what the bank tells them about its deposit rates. To a large extent, banks’ financial distribution businesses are designed to exploit this confusion. So far, the Reserve Bank has shown little initiative to tackle this issue and there’s nothing in the committee’s recommended new structure that would lead to any improvement. An external agency that responds to consumer complaints could do little else but respond on a case-by-case basis.
Still, if these recommendations are implemented, it would be a huge step forward. Of course, that’s a big if. Building a new structure involves tearing down many old ones and that never comes easy in government.