FSLRC
Financial Sector Legislative Reforms Commission
Set up in March 2011 by Ministry of Finance
To examine the existing age old institutional framework governing the financial sector in India and suggest reforms
Headed by Former Justice S M Krishna and has members from various disciplines like law, finance, public administration, economics etc.
Main intention:-
In spite of the drastically changing global scenario, over 60 acts, rules and regulations, some decade old laws have been getting only a few modifications without a substantial change in the basic foundation of laws. This Commission suggests an overhaul of all those laws and provides a structure to deal with all the financial products and services under one head.
Tasks:-
First task - To develop strategy in 9 areas of financial law (listed later)
Second task – To establish financial regulators and provide for independence as well as accountability of the regulators.
All the suggestions in brief (main points for short answer)
Securities and Exchange Board of India (SEBI), Forward Markets Commission (FMC), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) should be merged into a Unified Financial Agency (UFA).
Role of RBI should be restricted to regulating banks and managing monetary policy.
Setting up of seven agencies for managing the financial sector (described in detail later) - RBI, UFA, Financial Sector Appellate Tribunal (FSAT), Financial Sector Development Council (FSDC),Resolution Corporation, Financial Redressal Agency and Public Debt Management Agency
FSDC should be given statutory framework.
Setting up of a new Debt Management Office (DMO) and subsuming the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) into the Resolution Corporation.
9 elements of Financial Law
1. Consumer Protection:-
To break caveat emptor attitude (which means the buyer alone is responsible for assessing the quality of purchase before buying)
Establishing FRA – consumers can complain here about all the financial firms – one stop agency
The problems will not only be solved but also be used as feedback to improve regulation
2. Micro-prudential regulation:-
If a financial firm makes a promise to a consumer, that promise has to be checked whether it can be upheld or if it would lead to the failure of the firm. This regulation is principle based.
For example, principles require proportionality (greater restrictions for greater risk), equal treatment (equal treatment of equal risk), and so on.
3. Resolution:-
A 'Resolution Corporation' would keep a check on all financial firms which made promises and when a firm is reaching the stage of closure, It would intervene even before it is completely bankrupt (i.e. networth of the firm is near zero but not negative) and force shutdown or sale of the firm thus protecting small consumers either by trasnferring them to more reliable firms or paying them.
The main difference between micro-prudential regulation and resolution is that micro-prudential regulation is a continuous affair whereas resolution comes into picture when a firm is about to fail. Both would have close co-ordination.
The above three are the main pillars of the proposed financial law.
4. Capital Control:-
Ministry of Finance would make ‘rules’ that control inbound capital flows (and their repatriation) and RBI would make ‘regulations’ about outbound capital flows(and their repatriation).
The implementation of all capital controls would vest with the RBI.
5. Systematic Risk:-
The essence of the systemic risk perspective to look at the financial system as a whole(not one firm or one sector etc. Can be considered as bigger version of micro-prudential regulation)
(Financial Stability and Development Council (FSDC)), will analyse the entire financial system and not
a subset of it
6. Financial inclusion and market development:-
The objectives are
Infrastructure development of market – to be done by regulators - like taking initiatives etc
Redistribution and financial inclusion – to be done by govt - like notifications in gazette etc
7. Monetary Policy:-
RBI has complete powers in deciding this
8.Public Debt Management Agency:-
Debt management requires an integrated picture of all onshore and offshore liabilities of the Government. At present, this information is fragmented across RBI and the Ministry of Finance. Unifying this information, and the related debt management functions, will yield better decisions.
The tasks of cash management and an overall picture of the contingent liabilities of the Government are integrated into this single agency
9. Contracts, trading and market abuse:-
Objectives are to regulate infrastructure institutions which impact the financial markets, regulate commercial laws and ensure integrity of the information provided by the financial markets. (The information provided by the securities etc has public goods characteristic and falsification of that information is called market abuse)
The seven agencies proposed by FSLRC
1. Reserve Bank of India
RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.
2. Unified Financial Agency
This would implement consumer protection law and micro-prudential law for all financial firms other than banking and payments. Thus all the financial trading would be organised under one head which would lead to consistency of regulation of all the firms. Also since the regulatory agency is the same in all sectors a level playing field would be provided for all the sectors. Since it takes over the work from RBI on areas of Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, there would be clear marking of functions between the two agencies. This avoids conflict thus helping achieving accountability.
3. Financial Sector Appellate Tribunal
The present SAT will be subsumed in FSAT, which 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.
4. Resolution Corporation
The present Deposit Insurance and Credit Gaurentee Corporation of India (DICGC) will be subsumed into the Resolution Corporation which will work across the financial system.
5. Financial Redressal Agency
This new agency will setup a nationwide machinery where consumers can file complaints against all financial firms.
6. Public Debt Management Agency
An independent debt management office is proposed.
7. Financial Stability and Development Council
The existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.
References:-
http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf
http://articles.economictimes.indiatimes.com/2013-07-05/news/40392208_1_fslrc-financial-sector-appellate-tribunal-unified-financial-agency
Details:-
Manasa Srinivasan
Any
Financial Sector Legislative Reforms Commission
Set up in March 2011 by Ministry of Finance
To examine the existing age old institutional framework governing the financial sector in India and suggest reforms
Headed by Former Justice S M Krishna and has members from various disciplines like law, finance, public administration, economics etc.
Main intention:-
In spite of the drastically changing global scenario, over 60 acts, rules and regulations, some decade old laws have been getting only a few modifications without a substantial change in the basic foundation of laws. This Commission suggests an overhaul of all those laws and provides a structure to deal with all the financial products and services under one head.
Tasks:-
First task - To develop strategy in 9 areas of financial law (listed later)
Second task – To establish financial regulators and provide for independence as well as accountability of the regulators.
All the suggestions in brief (main points for short answer)
Securities and Exchange Board of India (SEBI), Forward Markets Commission (FMC), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) should be merged into a Unified Financial Agency (UFA).
Role of RBI should be restricted to regulating banks and managing monetary policy.
Setting up of seven agencies for managing the financial sector (described in detail later) - RBI, UFA, Financial Sector Appellate Tribunal (FSAT), Financial Sector Development Council (FSDC),Resolution Corporation, Financial Redressal Agency and Public Debt Management Agency
FSDC should be given statutory framework.
Setting up of a new Debt Management Office (DMO) and subsuming the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) into the Resolution Corporation.
9 elements of Financial Law
1. Consumer Protection:-
To break caveat emptor attitude (which means the buyer alone is responsible for assessing the quality of purchase before buying)
Establishing FRA – consumers can complain here about all the financial firms – one stop agency
The problems will not only be solved but also be used as feedback to improve regulation
2. Micro-prudential regulation:-
If a financial firm makes a promise to a consumer, that promise has to be checked whether it can be upheld or if it would lead to the failure of the firm. This regulation is principle based.
For example, principles require proportionality (greater restrictions for greater risk), equal treatment (equal treatment of equal risk), and so on.
3. Resolution:-
A 'Resolution Corporation' would keep a check on all financial firms which made promises and when a firm is reaching the stage of closure, It would intervene even before it is completely bankrupt (i.e. networth of the firm is near zero but not negative) and force shutdown or sale of the firm thus protecting small consumers either by trasnferring them to more reliable firms or paying them.
The main difference between micro-prudential regulation and resolution is that micro-prudential regulation is a continuous affair whereas resolution comes into picture when a firm is about to fail. Both would have close co-ordination.
The above three are the main pillars of the proposed financial law.
4. Capital Control:-
Ministry of Finance would make ‘rules’ that control inbound capital flows (and their repatriation) and RBI would make ‘regulations’ about outbound capital flows(and their repatriation).
The implementation of all capital controls would vest with the RBI.
5. Systematic Risk:-
The essence of the systemic risk perspective to look at the financial system as a whole(not one firm or one sector etc. Can be considered as bigger version of micro-prudential regulation)
(Financial Stability and Development Council (FSDC)), will analyse the entire financial system and not
a subset of it
6. Financial inclusion and market development:-
The objectives are
Infrastructure development of market – to be done by regulators - like taking initiatives etc
Redistribution and financial inclusion – to be done by govt - like notifications in gazette etc
7. Monetary Policy:-
RBI has complete powers in deciding this
8.Public Debt Management Agency:-
Debt management requires an integrated picture of all onshore and offshore liabilities of the Government. At present, this information is fragmented across RBI and the Ministry of Finance. Unifying this information, and the related debt management functions, will yield better decisions.
The tasks of cash management and an overall picture of the contingent liabilities of the Government are integrated into this single agency
9. Contracts, trading and market abuse:-
Objectives are to regulate infrastructure institutions which impact the financial markets, regulate commercial laws and ensure integrity of the information provided by the financial markets. (The information provided by the securities etc has public goods characteristic and falsification of that information is called market abuse)
The seven agencies proposed by FSLRC
1. Reserve Bank of India
RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.
2. Unified Financial Agency
This would implement consumer protection law and micro-prudential law for all financial firms other than banking and payments. Thus all the financial trading would be organised under one head which would lead to consistency of regulation of all the firms. Also since the regulatory agency is the same in all sectors a level playing field would be provided for all the sectors. Since it takes over the work from RBI on areas of Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, there would be clear marking of functions between the two agencies. This avoids conflict thus helping achieving accountability.
3. Financial Sector Appellate Tribunal
The present SAT will be subsumed in FSAT, which 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.
4. Resolution Corporation
The present Deposit Insurance and Credit Gaurentee Corporation of India (DICGC) will be subsumed into the Resolution Corporation which will work across the financial system.
5. Financial Redressal Agency
This new agency will setup a nationwide machinery where consumers can file complaints against all financial firms.
6. Public Debt Management Agency
An independent debt management office is proposed.
7. Financial Stability and Development Council
The existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.
References:-
http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf
http://articles.economictimes.indiatimes.com/2013-07-05/news/40392208_1_fslrc-financial-sector-appellate-tribunal-unified-financial-agency
Details:-
Manasa Srinivasan
Any
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