When production of goods and services is owned and controlled by the government, there is no need for regulators; it is the regulator itself. The need for independent regulators is felt when markets are opened up since free markets don’t by themselves lead to best practices for consumers, employees and investors.
Almost two decades after financial markets began getting unlocked in India, we find ourselves saddled with five money-linked regulators—one each for banking, capital market, insurance, futures and pensions. The fragmented thought that led to the formation of each regulator sequentially, rather than with a cohesive strategy in mind, is directly the cause of the turf war between all five. The issue came to light with the battle between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) over who will regulate unit-linked insurance plans (Ulips) spilling into the public domain.
Illustration: Jayachandran / Mint
A Ulip is a thinly disguised mutual fund carrying a crust of insurance. Sebi is of the view that any market-linked product should be under its jurisdiction. With the bulk of new sales coming from Ulips, Irda is loath to roll over. The battle now becomes more complicated because Ulips are being sold heavily by banks to their customers. Banks come under a third regulator—the Reserve Bank of India (RBI). Though RBI is missing from the public battle, there is enough discussion inside the oldest regulator on how banks are using sharp practices to sell Ulips.
Piecemeal regulation and a focus on regulator ease rather than consumer confidence has led to similar looking and sounding (the firms sound exactly the same) products being offered by firms that come under three different regulators (Sebi, Irda and Pension Fund Regulatory and Development Authority) with different cost and product structure rules.
It is not as if there is hubris within North Block, but it takes a gargantuan effort for a government machinery to challenge and transform itself. The high-level coordination committee comprising all financial sector regulators is a case in point. This was seen as a way to smoothen the wrinkles between various regulators, but with RBI clearly not in its favour, this one way out now hangs fire.
To use the public spat to rethink money-linked regulators would befit the finance minister of a country that has ambitions of doubling its per capita income in the next decade. The crucial role that household savings will play in the next 10 years is obvious. We need a function-based regulatory system rather than an entity- and product-based one. Mr Mukherjee, are you reading?
How should financial markets be regulated? Tell us at firstname.lastname@example.org