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Life Insurance - Undermining the regulatory system
21-Jul-2010
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The recently promulgated Ordinance to amend laws relating to securities and insurance increases the scope and opportunities for disputes, leaving little room for the existing formal and informal mechanisms to function. About a month ago, the Government of India promulgated the Securities and Insurance Laws (Amendment and Validation) Ordinance. According to the accompanying explanatory note, it was triggered by the jurisdictional dispute between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) over the regulation of Unit Linked Insurance Policies, or ULIPs. A move to refer the dispute to the judiciary was aborted. The dispute was resolved following the direct intervention of the Finance Minister.

Was the Ordinance necessary to validate the procedure? In the event, it goes much beyond that in creating a new institutional mechanism to settle "all future jurisdictional issues on all financial market products falling under the regulatory jurisdiction of the RBI, SEBI, IRDA, PFRDA or the central government". For this purpose, it provides for the creation of a joint committee, chaired by the Finance Minister and with the Finance Secretary as the convener. This committee, which will include the chairpersons of the above-mentioned regulatory bodies as members, is empowered to consider and decide on all disputes within a specified period of time. And its decision, to be notified by the government, will be binding on all the agencies concerned.

The purpose, scope and content of the Ordinance, as well as the manner in which it has been promulgated, raises serious issues that have attracted widespread critical comment in the media.

Coordination Committee

There is little basis for the presumption that there are, or will be, numerous jurisdictional disputes among regulators in the financial sector. Such disputes among them have been rare. Very few have so far got out of hand. Ambiguities and grey areas have been handled quite well under existing mechanisms - both formal and informal - for dealing with any disputes that arise. There is already the High Level Coordination Committee comprising representatives of all regulatory bodies and the Finance Ministry, which provides ample opportunity for the Ministry to convey its viewpoint and resolve issues through informal discussion.

There are also other avenues - particularly the frequent meetings of regulators with the Ministry - for informal and continuing exchange of views on emerging issues relating to monetary policy and, more generally, regarding the health of the financial sector which are in the domain of the Reserve Bank of India in relation to the government's fiscal and exchange rate policies.

Considering the constraints imposed by the "impossible trinity" in achieving full coordination of all policies between the RBI (which has the statutory mandate to ensure financial stability), other regulators and the government, it is widely recognised that the process has worked reasonably smoothly. Indeed, the RBI has earned a richly deserved and enviable reputation among central bankers and financial regulators the world over for its prescience in anticipating the burgeoning of high-risk bank lending in the domestic financial system (and also at the international level) and for weathering two major crises by taking effective preventive measures.

It is worth noting that deliberations in world forums (the summits of the G8 and G20 countries), and among academics in the wake of the recent worldwide crisis, show near-universal agreement on the need for stronger, stricter and more transparent mechanisms that are independent of the government, to regulate the financial sector and coordinate among regulators. Ongoing regulatory reform in most of the developed countries reflects this consensus. The Ordinance not only goes against these trends but also violates the fundamental precondition for effective regulation: namely, vesting it with autonomous bodies which function transparently and in a professional manner, insulated from external pressures, be it from the government, the political class or entities that are to be regulated. These, in fact, are the basic principles underlying the existing laws for regulatory institutions in the financial sector, as indeed of regulators of other important sectors such as electricity and telecommunications. There are, and will be, jurisdictional disputes and turf wars. In the case of electricity and telecom, the law specifically provides for the resolution of disputes through independent tribunals or the courts. In the case of the financial sector, these have been handled, by and large smoothly through informal mechanisms.

Any significant ambiguities or grey areas can be taken care of by suitable amendments of the relevant statutes and by appropriately strengthening existing institutions for consultation and coordination, without compromising the autonomy of the regulators.

Resolving disputes

This does not in any way detract from the basic principle that regulatory agencies must function within the framework of policies decided by elected governments and laws enacted by Parliament. Furthermore, the existing legislation empowers the government to give directions to the regulators. There is, therefore, no warrant to abandon the cardinal principle of separation of powers between the different branches of government, of which regulatory agencies are a part. Instead, by expanding the range of disputes that can be raised by any member and making reference to the joint committee mandatory, the Ordinance undermines the regulatory system. It vastly increases the scope and opportunities for disputes, leaving little room for the existing formal and informal mechanisms to function. Besides impeding the smooth functioning of existing institutions, it will seriously compromise their capacity to perform their statutory responsibility to ensure the health and stability of the financial system. As with other sector regulators, such disputes are best resolved through independent tribunals.

With the Finance Minister as chair and the Finance Secretary as convener of the joint committee, and of the proposed new super-regulator in the form of a Financial Stability and Development Board, the door is open for the executive arm of the government to take effective control over the regulation of the financial sector. We are familiar with regulatory capture by entities that are supposed to be regulated, but government capture of regulatory functions is unheard of.

Need for scrutiny

Despite misgivings articulated by several regulatory agencies, economists and media commentators, the government announced its decision to set up, headed by the Finance Minister, a Financial Supervision and Development Board as the super-regulator. In any case, the need for promulgating this Ordinance, fraught with far-reaching consequences for the integrity of the regulatory system, is unclear. That it has been done so precipitously, without consulting the affected entities, is both surprising and intriguing. So is the news that this was done in consultation with the Economic Advisory Committee chaired by a former RBI Governor who was a strong defender of its autonomy.

The intent behind the promulgation of the Ordinance, and its implications, has attracted widespread and strong criticism in the media. One hopes that these concerns are taken seriously and that appropriate modifications will be made in the Bill to be presented to Parliament to replace the Ordinance, and that these will be dealt with carefully by the Parliamentary Standing Committee that will scrutinise it.

Source : Business Line
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