8/11/2019 FSLRC Report Summary

http://slidepdf.com/reader/full/fslrc-report-summary 1/2

Vishnu Padmanabhan

vishnu@prsindia.org April 3, 2013

PRS Legislative Research Institute for Policy Research Studies

3 rd Floor, Gandharva Mahavidyalaya 212, Deen Dayal Upadhyaya Marg New Delhi – 110002

Tel: (011) 43434035-36, 23234801-02 www.prsindia.org

Report SummaryThe Financial Sector Legislative Reforms ommission The Financial Sector Legislative Reforms

Commission (FSLRC), constituted by the Ministry ofFinance in March 2011, was asked tocomprehensively review and redraw the legislationsgoverning India’s financial system. According to theFSLRC, the current regulatory architecture isfragmented and is fraught with regulatory gaps,overlaps, inconsistencies and arbitrage. To addressthis, the FSLRC submitted its report to the Ministry ofFinance on March 22, 2013, containing an analysis ofthe current regulatory architecture and a draft IndianFinancial Code to replace the bulk of the existingfinancial laws.

The Draft Indian Financial Code

The draft Code is a non-sectoral, principles-based law bringing together laws governing different sectors ofthe financial system. It addresses nine components,which the FSLRC believes any financial legalframework should address:

Consumer protection : Regulators should ensure thatfinancial firms are doing enough for consumer

protection. The draft Code establishes certain basic

rights for all financial consumers and creates a singleunified Financial Redressal Agency (FRA) to serve anyaggrieved consumer across sectors. In addition, theFSLRC considers competition an important aspect ofconsumer protection and envisages a detailedmechanism for cooperation between regulators and theCompetition Commission.

Micro-prudential regulation: Regulators shouldmonitor and reduce the failure probability of a financialfirm. The draft Code specifies five powers for micro-

prudential regulation: regulation of entry, regulation ofrisk-taking, regulation of loss absorption, regulation ofgovernance and management, and

monitoring/supervision. Resolution: In cases of financial failure, firms should

be swiftly and sufficiently wound up with the interestsof small customers. A unified resolution corporation,dealing with various financial firms, should be createdto intervene when a firm is close to failure. The

resolution corporation would charge a fee to all firms based on the probability of failure.

Capital controls: While the FSLRC does not hold aview on the sequencing and timing of capital accountliberalisation, any capital controls should beimplemented on sound footing with regards to publicadministration and law. The FSLRC sees the Ministryof Finance creating the ‘rules’ for inbound capitalflows and the RBI creating the ‘regulations’ foroutbound capital flows. All capital controls would be

implemented by the RBI. Systemic risk: Regulators should undertake

interventions to reduce the systemic risk for the entirefinancial system. The FSLRC envisages establishingthe Financial Stability and Development Council(FSDC) as a statutory agency taking a leadership rolein minimizing systemic risk.

Development and redistribution: Developing marketinfrastructure and process would be the responsibilityof the regulator while redistribution policies would beunder the purview of the Ministry of Finance.

Monetary policy: The law should establishaccountability mechanisms for monetary policy. TheMinistry of Finance would define a quantitative targetthat can be monitored while the RBI will beempowered with various tools to pursue this target. Anexecutive Monetary Policy Committee (MPC) would

be established to decide on how to exercise the RBI’s powers.

Public debt management: The draft Code establishes aspecialised framework for public debt managementwith a strategy for long run low-cost financing. TheFSLRC proposes a single agency to managegovernment debt.

Contracts, trading and market abuse: The draft Codeestablishes the legal foundations for contracts, propertyand securities markets.

8/11/2019 FSLRC Report Summary

http://slidepdf.com/reader/full/fslrc-report-summary 2/2

Report Summary PRS Legislative Research

Regulators

With respect to regulators, the FSLRC stresses theneed for both independence and accountability. Thedraft Code adopts ownership neutrality whereby theregulatory and supervisory treatment of a financial firmis the same whether it is a private or public company.The draft Code seeks to move away from the currentsector-wise regulation to a system where the RBI

regulates the banking and payments system and aUnified Financial Agency subsumes existing regulatorslike SEBI, IRDA, PFRDA and FMC, to regulate therest of the financial markets.

Regulators will have an empowered board with a precise selection-cum-search process for appointmentof members. The members of a regulatory board can

be divided into four categories: the chairperson,executive members, non-executive members andGovernment nominees. In addition, there is a generalframework for establishing advisory councils tosupport the board. All regulatory agencies will befunded completely by fees charged to the financialsystem. Finally, the FSLRC envisages a unifiedFinancial Sector Appellate Tribunal (FSAT),subsuming the existing Securities Appellate Tribunal(SAT), to hear all appeals in finance. Table 1 providesan outline of the FSLRC’s proposed regulatoryarchitecture.

Table 1: FSLRC’s regulatory architecture

Present Proposed Functions

RBI RBI

Monetary policy;regulation andsupervision of

banks;regulation andsupervision of

paymentssystem.

SEBIFMCIRDAPFRDA

United financialagency (UFA)

Regulation andsupervision ofall non-bankand paymentsrelated markets.

SecuritiesAppellateTribunal(SAT)

FSATHear appealsagainst RBI, theUFA and FRA.

DepositInsurance andCreditGuaranteeCorporation(DICGC)

ResolutionCorporation

Resolution workacross the entirefinancialsystem.

FinancialStabilityDevelopmentCouncil(FSDC)

FSDC

Statutoryagency forsystemic riskanddevelopment.

DebtManagementAgency

An independentdebtmanagement

agency.

New entities

FinancialRedressalAgency (FRA)

Consumercomplaints.

Source: FSLRC Report; PRS.

DISCLAIMER: This document is being furnished to you for your information. You may choose to reproduce or redistribute this report for non-commercial purposes in part or in full to any other person with due acknowledgement of PRS Legislative Research (“PRS”). The opinionsexpressed herein are entirely those of the author(s). PRS makes every effort to use reliable and comprehensive information, but PRS does notrepresent that the contents of the report are accurate or complete. PRS is an independent, not-for-profit group. This document has been preparedwithout regard to the objectives or opinions of those who may receive it.