Imagine a fast car. Now imagine that it has four different wheels from four different vehicles of four different vintages, with the cycle tyre forcing the car to stick to the lowest common speed possible. Worse, not only are some wheels old, they don’t seem to want to go to the same place. Sometimes, they even try and attack each other. Unsurprisingly, the car doesn’t go very fast. Or very far.

The Indian financial sector today resembles that car. The Reserve Bank of India Act is vintage 1934 and the Insurance Act dates to 1938. There is regulatory arbitrage, and a piece-meal approach to regulatory action. The Financial Sector Legislative Reforms Commission (FSLRC) was set up in 2001 to draft a new legal and regulatory system for the financial sector. The Approach Paper uploaded on Monday is a broad strokes look at what a new regulatory system should look like.

Based on the common law approach, the new laws will look at a principle based world with individual regulators writing subordinated legislation that could be rules or principle based, depending on the regulatory objective. These laws will be across eight areas : consumer protection, micro-prudential regulation, resolution of failing financial firms, capital controls, systemic risk, development, monetary policy, and debt management. The commission puts consumer protection at the heart of this system with both prevention and cure getting due space. The paper proposes that India move from a buyer beware system to one where the manufacturer and seller are responsible and cure will see the setting up of a Financial Redressal Agency—a pan-India consumer organization.

The new regulatory system proposed looks at a clean-up in the current regulatory regime starring multiple regulators and that should minimize the probability of a regulatory turf war. The Reserve Bank of India (RBI) will keep its status as the central bank with a focus on monetary policy, but will also be responsible for consumer protection and micro-prudential law in banking and payments. The capital market, insurance, pension, forward markets regulators stand to be merged into the United Financial Agency that enforces consumer protection law and micro-prudential law in all areas other than banking. A resolution agency, a unified appellate body, a consumer complaints agency, the Financial Redressal Agency, the Financial Stability and Development Council (FSDC) and an independent debt management office are the other five agencies. The commission is proposing two contentious issues: separating out the debt management function of RBI from its other functions and collapsing four financial sector regulators into one body. These are brave plans and it will need a mixture of luck and strong political will to see them through.

What is needed to implement FSLRC’s roadmap? Tell us at views@livemint.com

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