New Delhi: A commission that studied possible reforms in the financial sector has suggested a merger of multiple financial regulatory agencies into one overarching authority that would have oversight of the capital market, insurance sector, pension funds and commodities futures trading—a proposal that, if accepted, would help consolidate the scattered regulation of financial products.

In an approach paper released on Monday, the Financial Sector Legislative Reforms Commission (FSLRC) headed by retired Supreme Court judge B.N. Srikrishna said the proposed unified financial agency would enforce consumer protection and so-called micro-prudential laws in all financial segments other than banking and payments.

The paper proposed a merger of capital market regulator Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, the Pension Fund Regulatory and Development Authority and the Forward Markets Commission, which oversees commodities futures trading.

The combined authority would also take over regulation of organized financial trading (bonds, currencies, derivatives) from the Reserve Bank of India (RBI); it would thus serve as the watchdog for markets including equities, government and corporate bonds, currencies and commodities futures.

The commission said shifting away from sectoral laws would lead to a consistent treatment across sectors.

“It is increasingly clear that the lines that separate banking or insurance or mutual funds or pension fund management are hard to define. Non-sectoral laws that apply uniformly across the financial system eliminate such inconsistencies of treatment. They also eliminate the problems of gaps and overlaps," it said.

A financial sector expert speaking on condition of anonymity said the approach paper represents the first clear-headed thinking on the subject of financial sector regulatory reform.

The entire architecture needs a relook, said the expert, arguing that the present regulatory framework is more the result of an accident of history than planning.

“While the private sector re-orients and reorganizes the company structures keeping in mind its mission, we in the government somehow got stuck. The system needs a complete overhaul," he said.

The Srikrishna commission also proposed converting the current Securities Appellate Tribunal into a Financial Sector Appellate Tribunal that would hear appeals in all cases involving financial regulation. It advocated a Financial Redressal Agency (FRA) to address consumer complaints across the financial system.

At the conceptual level, RBI will perform these functions: decide monetary policy, regulate and supervise banks, and regulate and supervise the payments system in enforcing the proposed consumer protection and micro-prudential laws. In order to minimize conflicts of interest, FSLRC suggested these functions be performed by three distinct boards.

In order to protect consumer interests, the commission proposed a unified consumer protection law that would contain three components: an enumerated set of rights and protections for consumers, an enumerated set of regulatory powers, and principles to guide what powers should be used under what circumstances.

Some of the rights and safeguards FSLRC proposed for consumers are protection against unfair terms of contract, against misleading and deceptive conduct, the right to receive support to enter suitable contracts, the right to receive reasonable quality of service, and the right to data privacy and security.

Turning from prevention to cure, the commission proposed the creation of a unified FRA. The agency would have front ends in every district of the country, where consumers of all financial products would be able to submit complaints.

Technology would be used to connect up these front ends to a centralized adjudication process. Consumers will deal only with FRA when they have grievances in any financial activity, and not with multiple regulators.

Shishir Mehta, a partner at Khaitan and Co., said the approach paper was essentially suggesting consolidation of financial regulation.

“The approach paper is a timely piece per se which looks at consolidating scattered financial regulation in our country," Mehta said.

To be sure, the suggestions are only in the nature of outlining a possible approach that could be taken towards non-banking financial sector reforms. The commission is seeking feedback on the approach paper, which shows the contours of the legal-institutional framework FSLRC may recommend.

“It is a provisional document, and the thinking of the FSLRC will evolve in coming months, utilizing various inputs, including the analysis of this document in the public domain," it said.

The commission was set up in March 2011 with the mandate of rewriting and harmonizing decades-old financial sector legislation, rules and regulations. FSLRC was required to submit its findings within two years. The commission has invited feedback on the approach paper, after which it will release its full report in March 2013.

Sunil B.S. in Mumbai contributed to this story.

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