Home / Opinion / IFC gets a Modi push

A recent news report (http://goo.gl/Z3BllG ) talked of Prime Minister (PM) Narendra Modi putting his weight behind the rewriting of the Indian financial sector laws. It spoke of the President alerting the PM in early October this year of the shoddy progress being made in implementation of the financial sector reform initiated when Pranab Mukherjee was finance minister in 2010. The story reported that the purge in the Ministry of Finance of bureaucrats last month was due to them stonewalling this reform. Curiously, some of the bureaucrats transferred out were actually pushing really hard at getting the Indian Financial Code (IFC) implemented, but then politicking can be a blunt instrument.

While the politics will play out over time, the good news for us as consumers of retail finance products is that the new government is putting its weight behind the IFC—the draft that rewrites financial sector law. The draft IFC aims to clean out and refurbish the legal superstructure of finance in India. It correctly identifies consumer well-being as the central objective of the financial sector and puts consumer protection at the heart of this reform. Around its core are ideas on governance reform with a focus on objectives of regulation, and the powers that rest with regulators and accountability.

In 2014, as India stands poised to begin a growth spurt that should last at least a decade, we’re held back by a financial system that is super efficient in parts and still in the dark ages in others—think capital market system and design versus insurance sector design to see the difference. Imagine a vehicle that has one state-of-the-art tyre and the other one is a bullock cart’s wooden wheel. The road on which this odd vehicle travels is full of pot holes, traps and has areas of fog that make taking long-term driving calls impossible—both for the drivers and the passengers (think entrepreneurs and consumers). The lack of a standardized traffic management system means that some vehicles are free to overspeed and kill (think life insurance and ponzi schemes) while others are chained so hard that they can barely breathe (think mutual funds). Faced with a financial system that is so badly designed, is it any surprise that Indians invest less than a third of their savings in the financial sector and prefer the safety of real assets such as gold and real estate?

To understand the change proposed, imagine the Indian financial sector as an ancestral home where rooms are added, balconies covered and back yards enclosed in a case-by-case, event-by-event manner as the family expands with no particular design or efficiency parameters in mind. This is why we have a multiplicity of financial sector regulators that engage in turf wars over the lucrative parts of the market and turn a blind eye to those that fall in the regulatory cracks.

To understand why this is a problem, imagine that you are in the market for a pension product. You have the option of a product that comes under the regulatory umbrella of several regulators. The Employees’ Provident Fund Organisation (EPFO) and Employee Pension Scheme (EPS) come under the labour ministry. Pension plans from insurance companies are regulated by Insurance Regulatory and Development Authority (Irda). Pension plans from mutual funds are regulated by the Securities and Exchange Board of India (Sebi). The National Pension System (NPS) is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Each product is governed by a different set of rules and incentives that drive sales with huge differences. Guess which you will end up buying—the one that works the least for you, and the most for those producing and selling.

If implemented, the IFC will collapse four regulators (Sebi, Irda, Forward Markets Commission and PFRDA) into the Unified Financial Agency (UFA), ending regulatory arbitrage. Consumers of financial products will no longer have to choose regulators but can focus on products. Helping them choose will be distributors and advisers who will operate in a ‘seller-beware’ world. This means that the seller or adviser will need to put the interest of the consumer before her own. These rights will be enforced by the Financial Redress Agency (FRA).

The IFC’s design rests on seven financial agencies. While task forces have been set up on four, the two important to consumers await attention (http://goo.gl/i96Gyl ). Creation of the UFA and the FRA are still to get the attention they need. If this government is serious about financialization of Indian households’ savings and financial inclusion, collapsing the clunky, turf-grabbing regulators into one cohesive body will be important. Equally important will be ensuring that individuals (who have no lobbies fighting for them) have the comfort that they can trust financial products and service providers.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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