Wanted: A Financial Regulator for India

There is a debate on who should keep an eye on the money that you invest in Unit Linked Insurance Policies (ULIPs)? The mutual fund industry feels it should be the Securities and Exchange Board of India (SEBI) as ULIPs are basically investment products. But ULIPs are sold by insurance firms under the garb of protecting the consumer. So the insurance sector feels that in keeping with international norms, the Insurance Regulatory and Development Authority (IRDA) must regulate it.

So, who should regulate companies that fall between two sectors or fall under more than one sector?

The Problem
This is not the only sector which faces a regulatory dilemma. When gold exchange traded funds were being launched in the country it was not clear if such products should fall directly under the Reserve Bank of India (RBI) regulation or the forward market commission which is the regulatory body for commodities. Similarly, when currency trading started in the country, many felt that it should come under RBI but is now being regulated by SEBI.

The ULIP issue itself has a twist. The top five mutual funds in India account for 56 percent of the total assets of the industry. These funds belong to big financial conglomerates that have a presence in banking, insurance, personal loans etc. Apart from UTI, all the other top players have a dominating presence in selling insurance products. So whenever pure play mutual fund players cry hoarse about mis-selling of insurance policies they hardly get a hearing.

“If the mutual fund parent has an insurance arm he will concentrate more on the insurance side as that is where the money is and that is what the agents want to sell. Thus the parent itself will cannibalise the mutual fund industry and try to play SEBI and IRDA if it benefits him,” says a fund manager who did not wish to be named.

Meanwhile the Pension Fund Regulatory and Development Authority (PFRDA) has recommended that insurance agents’ commission be scraped within two years. Agents feel that the PFRDA has nothing to do with the insurance segment and only IRDA has the right to take decisions about the insurance sector.

The Solutions
So is a super regulator the solution to all these problems?

UK has a super regulator — the Financial Services Authority — which many feel was not effective at the time of the financial crisis. So, the model has failed.

Others say that multi regulatory models have not worked either. The US had multiple regulators, yet the crisis originated in that country.

Academicians as well as market players have proffered different solutions. J. R. Varma, professor of finance at IIM Ahmedabad says, “A unified approach is better than to have many regulators. This does not mean that all the problems will be solved but much confusion can be avoided by having one single regulator.” He says that all models have failed in the present crisis and that is applicable to regulators as well. But in balance he feels that the super regulator is a better idea. Like Varma, the chief executive officer of a stock exchange who did not wish to be named, also feels nothing has worked. But he has a different view on super regulators. “The FSA model has failed in the UK so has the US regulatory model. We need to wait and watch for some time. But a unified approach will never work in India as it will create more bureaucratic hurdles,” he says.

Our Take
A super regulator is suited for the Indian market because by creating many regulators we are only creating more hurdles for the average investor and entrepreneur. If a single company can operate in multiple financial products then it is also better for it to deal with a single regulator. By doing this, the regulator will not be dominated by one particular group and at the same time, a robust financial sector can be built where all the engines of growth will be linked together.