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The Financial Sector Legislative Reforms Commission, chaired by Justice Srikrishna, has recently released its two-volume Report containing a series of wide-ranging suggestions on the manner in which the financial sector has been regulated in this country. One of the major reforms suggested by the Commission is a draft “Indian Financial Code” for regulating financial institutions in the country. This Code is intended to replace the bulk of the country’s existing financial law.
The Commission, which was constituted on March 24, 2011, consisted of experts in law, public policy, administration, and finance. In the course of its existence, the Commission’s work included extensive consultations with the regulators, and stakeholders across India and experts in other jurisdictions as well.
The draft Indian Financial Code, spanning 450 Sections, is a “single unified and internally consistent” draft legislation that is meant to replace a large section of existing financial laws. The draft Code proposes a consolidation of institutions like SEBI, IRDA, FMC etc. into one regulator, a Unified Financial Authority that shall act as the regulator for all financial services barring banking and payment systems.
The draft Code, most importantly, establishes certain basic rights for all financial consumers placing a significant reponsibility of consumer protection upon financial institutions. The Commission envisages a single unified Financial Redress Agency (FRA), a one-stop agency that will hear complaints of retail consumers against financial firms and award remedies. The draft Code also sets out provisions for the establishment of a Resolution Corporation, which will subsume the functions of the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) and will have the capability to resolve failing financial firms; and a Financial Stability and Development Council, which will analyse the entire financial system and will also co-operate in proposing and implementing solutions.
Another recommendation of the Commission is to set up a Financial Sector Appellate Tribunal, which will replace the SAT and will hear appeals against RBI for its regulatory functions, the UFA, decisions of the FRA and some elements of the work of the resolution corporation.The aspiration of the Commission was to draft a body of law that will stand the test of time. These proposals would change the financial landscape of India, but it is to yet to be seen how and when the proposed transition will happen.
Bar & Bench speaks with the FSLRC Chairman Justice B.N. Srikrishna on the Report. In this interview, the Chairman talks about the challenges the Commission faced, the idea behind a UFA, and the transitional/implementation challenges.
Bar & Bench: The FSLRC had been entrusted with quite a mammoth task. What were some of the biggest challenges that your Commission faced?
Justice Srikrishna: There were several challenges. First, gathering updated information on what is happening in the financial sector around the world. Second, getting the views of experts from India and abroad on how best to redesign the financial architecture so that it can be expected to meet the likely challenges in the foreseeable future. Third, understanding the reasons why the recent Global Financial Crisis singed many countries, but did not greatly affect some others. Fourth, Interacting with the existing regulators and eliciting their reactions to a wholesale change in the regulatory architecture. Fifth, formulating all the knowledge gained into a concise, readable report and drafting legislation in simple English. All that, and before the deadline!
Bar & Bench: The FLSRC report proposes moving from a rule-based framework towards a principles based framework. What merits did the Commission see in this approach? wouldn’t a principles based framework lead to more uncertainty?
Justice Srikrishna: The dilemma was to strike the appropriate balance between the two. I would not say that the report takes either extreme stand on this issue. While rule based framework gives greater certainty, it is rigid and cannot be quickly modified to suit the myriad possibilities that may arise in today’s world. In the ever ongoing race of wits between the dishonest businessmen to make a quick buck and the regulators to contain the damage likely to be caused to the consumers, protean adaptability of regulation is a crucial necessity. With a principles based approach, that is gained far more easily. Irrespective of legal quibbling over the lettera legis, the regulator may, on the basis of the underlying principle, zero in on the wrongdoer and act swiftly to control damage to the consumer.
Bar & Bench: Some members of the FSLRC have recorded notes of dissent about several issues in the FSLRC report including recommendation of the Commission that the government will handle inflows and RBI will manage outflows. What are your thoughts?
Justice Srikrishna: That shows that the Commission’s deliberations were completely democratic and totally free from pressures. That there were honest differences of opinion on some issues is evident, but that per se need not detract the weight of the recommendations. Each of the dissenting notes is on a different issue as the dissenters were also not unanimous. Inflows and outflows of foreign money is basically a policy issue, which has to be decided by the executive. Even today that is so, but there is total confusion on who manages what, and at which level. All that the Commission has done is to let the Govt. formulate clear rules in consultation with the RBI and leave it to the RBI to implement the rules.
Bar & Bench: The Commission has proposed a Unified Financial Authority for India replacing institutions such as SEBI, IRDA, FMC etc. What is the idea behind this proposal? Don’t you feel that such a proposal will face tremendous opposition from the existing regulators?
Justice Srikrishna: The idea is to eliminate regulatory arbitrage and avoid the kind of turf wars we saw recently between regulators. If our regulators could see eye to eye on many issues and stop thinking only of their own turf, there would be no problem. With the ingenuity of financial product makers, they can always design products to fall into the regulatory gaps. If the focus has to be on the consumer, there ought to be a single regulator to hold them accountable, irrespective of the garb under which the financial product masquerades.
Bar & Bench: This Report has put consumer protection at the centre of all regulation. What was the thought process behind this?
Justice Srikrishna: Let us not forget that regulations are not for the benefit of regulators, but for the benefit of consumers by protecting them against foreseeable adverse consequences. In a competitive milieu, it is each for himself and God for all, as far as the businessmen are concerned; regulations are needed to protect the wary or unwary consumer from the fallout.
Bar & Bench: The draft code also seeks the establishment of a redressal mechanism to be administered by a new body called FRA – do you think that we have the required skilled manpower to man such an institution?
Justice Srikrishna: I would answer this with a series of rhetorical questions: Do we today have the requisite skills to manage any institution at all? If the answer is no, then should we shut down all institutions? If the answer is yes, then what is so special about FRA? If we cannot produce such skilled persons, then let us give up our ambition to be leaders of the world and reconcile ourselves to being a third world, third class country forever. The FSLRC was not commissioned to do repair work on a creaking financial engine; it was to design afresh an engine that would enable the country to surge ahead! There is a famous saying in Sanskrit: “Dhirastaranti vipadam na tu dinachittah” (‘The bold cross the hurdles, but not the pusillanimous’)
Bar & Bench: What transition/implementation challenges do you see if the recommendations of the Commission are accepted? What time-frame do to anticipate for the implementation of the proposals?
Justice Srikrishna: Several. First, and foremost, changing the mindset of status quo. Second, making the regulators understand the urgency to move ahead and impressing upon them the need to act here and now. Third, for the government to traverse the labyrinthine process of deliberating upon the recommendations at various levels and pushing through an appropriate legislation. Fourth, recruiting personnel with appropriate skills. Finally, making the transition as smooth as possible, avoiding all hiccups and glitches.
Bar & Bench would like to thank Smriti Parsheera and Sumathi Chandrashekaran, Consultants at National Institute of Public Finance and Policy (NIPFP) for their assistance in organising the interview.