India will create by March a committee of experts from outside the government that will suggest changes in financial laws to bring them in line with current needs. The committee, which will be called Financial Sector Legislative Reforms Commission (FSLRC), will be the second key financial reform initiative the finance ministry is determined to push through this fiscal.
On Tuesday, the finance ministry announced that a Financial Stability and Development Council (FSDC) would be shortly set up to oversee financial stability and guide efforts at inclusion and development in the sector. The creation of both FSDC and FSLRC was announced by finance minister Pranab Mukherjee in his Budget speech in February.
“Nobody has looked at the entire gamut (of financial products and services) as small parts of a larger whole,” explained a senior finance ministry official, who did not want to be named, on the idea behind FSLRC. “It will be something which will synergize the entire financial system,” the official added.
FSLRC’s approach would reflect that of a user and not that of an enforcer, the official said.
Most Indian financial laws are around 70 years old. The Reserve Bank of India (RBI) was set up through legislation in 1934 and the basic insurance law came into existence in 1938.
“Most of our legislations governing the financial sector are very old,” Mukherjee had said during his Budget speech. “Large number of amendments to these Acts made at different points of time has also increased ambiguity and complexity.”
At the other end of the chronological spectrum, the pension regulator, Pension Fund Regulatory and Development Authority (PFRDA), has not yet received statutory status though it regulates and guides a nascent pension market. Eventually, a legislation on PFRDA would have to be cleared by Parliament to give it quasi-judicial powers that other regulators have.
The finance ministry wants FSLRC to get into details and not restrict itself to broad suggestions. “We want them to make it neat, clean and mean,” the official said.
The details are expected to be the challenging part as the laws span a period of time when the financial sector has undergone significant changes. The sector has gradually moved from a phase when financial products operated in watertight compartments to one where are has been a mushrooming of hybrid products. The evolution has, at times, led to turf wars between regulators. The most recent one was in June this year between Insurance Regulatory and Development Authority (IRDA) and Securities and Exchange Board of India (SEBI) over regulation of unit linked insurance plans (Ulips), a hybrid product which has mix of mutual funds and insurance.
The finance ministry intervened in the turf dispute to settle it in IRDA’s favour. But the potential for more conflicts remains.
For instance, in an interview to Mint on 6 September, PFRDA chairman Yogesh Agarwal envisaged the pension market evolving in a way which could potentially trigger a conflict with the insurance regulator. “We consider ourselves as the regulator of the entire pension sector, and, in today’s market, you see most products are hybrid products that can come under multiple regulators,” Agarwal, said.
Agarwal hoped PFRDA would evolve from its current role of being a regulator of pension during the accumulation phase (when investments are made) to one which would regulate annuity service providers (ASPs). ASPs handle the latter half of the pension life cycle by offering a regular pension after retirement. Currently, only insurers play the role of ASPs.
“So, the fact is that our product is different from what insurance companies are providing,” Agarwal, said. “ASPs will work with the insurance regulator to see how best we can regulate them. But we would have ASPs outside the insurance sector also,” he added.
