Tuesday, 22 April 2014 09:45




The Finance Minister announced the formation of the Financial Sector Legislative Reforms Commission (FSLRC) (B. N. Srikrishna as Chairman) during his Budget speech of 2011-2012 to rewrite and harmonize financial sector legislations, rules and regulations.

There are over 60 Acts and multiple Rules/Regulations in the sector and many of them date back decades when the financial landscape was very different from what is obtaining today.

Large number of amendments made in these Acts over time has increased the ambiguity and complexity of the system. The Commission would simplify and rewrite financial sector legislations, including subordinate legislations, to bring them in line with the requirements of the sector to achieve harmony and synergy among them.

This will remove ambiguity, regulatory gaps and overlaps among the various legislations making them more coherent and dynamic and help cater to the requirements of a large and fast growing economy in tune with the changing financial landscape in an inter-connected financial world. In the long-term, it would help usher in the next generation of reforms, contribute to efficient financial intermediation enhancing the growth potential of the nation Structure of the regulator proposed by FSLRC

The proposed regulatory architecture, therefore, will consist of:

• The central bank as the monetary authority, banking regulator and payment system regulator.

• A unified regulator for the rest of the financial sector.

• A deposit insurance-cum-resolution agency.

• A public debt management agency.

• A financial redressal agency.

• A financial sector appellate tribunal.

• A mechanism for coordination, systemic risk, financial development and other issues where the role of multiple agencies are involved (FSDC/similar to FSDC).

The functions of each of these seven proposed agencies are as follows:

a) Reserve Bank of India

It is proposed that RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the proposed micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.

b) Unified Financial Agency

The Unified Financial Regulatory Agency would implement the consumer protection law and micro-prudential law for all financial firms other than banking and payments. This would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in Government agencies.

This proposed Unified Financial Regulatory Agency would also take over the work on organized financial trading from RBI in the areas connected with the Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, thus giving a unification of all organised financial trading including equities, government bonds, currencies, commodity futures and corporate bonds.

The unification of regulation and supervision of financial firms such as mutual funds, insurance companies, and a diverse array of firms which are not banks or payment providers, would yield consistent treatment in consumer protection and micro-prudential regulation across all of them.

c) Financial Sector Appellate Tribunal

The present SAT will be subsumed in FSAT, which will hear appeals against RBI for its regulatory functions, the Unified Financial Agency, decisions of the FRA and some elements of the work of the resolution corporation.

d) Resolution Corporation

The present Deposit Insurance and Credit Guarantee Corporation (DICGC) will be subsumed into the Resolution Corporation which will work across the financial system.

e) Financial Redressal Agency

The FRA is a new agency which will have to be created in implementing this financial regulatory architecture. It will setup a nationwide machinery to become a one stop shop where consumers can carry complaints against all financial firms.

f) Public Debt Management Agency

An independent debt management oice is envisioned.

g) Financial Stability and Development Council

Finally, the existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.

Regulators will have an empowered board with a precise selection-cum-search process for appointment of members.  The members of a regulatory board can be divided into four categories: the chairperson, executive members, non-executive members and Government nominees.  In addition, there is a general framework for establishing advisory councils to support the board.  All regulatory agencies will be funded completely by fees charged to the financial system.

Last Updated on Wednesday, 23 April 2014 07:12