Highlights of the draft IFC
The revised IFC, like any financial legal regulation, aims to curb market
failures. The draft addresses 9 components:
Consumer protection: As
it is more than mere issuance of warnings, the draft IFC ordains regulators to
ensure holistic protection and establishes 9 basic rights for the consumer. While
fair play would be mandated (prevention), grievance redressal (cure) would be
achieved by the Financial Redress Agency, one of the proposed agencies. FSLRC
deems that competition would give more power to the consumer and envisages a
mechanism for better cooperation between regulators and the Competition
Commission.
Micro-prudential regulation: Put simply, it is the task of constraining the behaviour of financial firms
to reduce probability of failure. Regulators have 5 powers to achieve this
goal: regulation of entry, regulation of risk-taking, regulation of loss
absorption, regulation of governance and management, and supervision.
Resolution: In
situations wherein micro-prudential regulation does not prevent failure,
resolution mechanisms come into play. The draft Code envisages a ‘resolution corporation’
to deal with various financial firms like banks, insurance companies, etc. and
intervene when the firm is nearing bankruptcy. The corporation will also
collect a fee from the firms depending on the probability and consequences of
failure.
Capital controls: While FSLRC has no view on the sequencing and timing of capital account
convertibility, its focus is on establishing sound principles of public administration
and law for capital controls. The FSLRC envisions the Finance Ministry making
‘rules’ to control inbound capital flows and the RBI making ‘regulations’ for
outbound capital flows. All capital controls will be implemented by the RBI.
Systemic risk: It
is about a collapse in functioning of the financial system that adversely
affects the economy. The FSLRC thus envisages creation of Financial Stability
and Development Council that would focus on minimising systemic risk by
fostering stability and resilience in the financial system.
Development and
redistribution: While initiatives for development of market infrastructure
and processes would be the responsibility of regulators, redistribution and
financial inclusion efforts would be the government’s duty. All such
initiatives should be subject to evaluation every 3 years.
Monetary Policy: The
FSLRC’s framework vests RBI with the independence while demanding
accountability, in creation of the monetary policy. The Finance Ministry will
set a quantifiable target that can be monitored while the RBI will have several
powers to achieve the target. The RBI can utilise the powers based on decisions
of the executive Monetary Policy Committee (MPC).
Public Debt Management
Agency: The draft IFC proposes this agency (that unifies debt management
functions of the RBI and Finance Ministry) for debt management that includes
cash and contingent liabilities of the government.
Contracts, trading
and market abuse: The FSLRC framework envisages a set of laws,
rules and statutes for contracts and property rights, securities and financial
markets. The framework also has provisions to curtail market abuse, which
includes insider trading, abuse of information, dissemination of
false/misleading information, conducting manipulative transactions, among
others.
Controversial
proposals of the draft IFC
Some of the Code’s provisions have led to several debates in
the country as they seem to be government’s attempt to usurp the central bank’s
powers.
1.
It proposes that the Monetary Policy Committee
(MPC) would have 4 government representatives and only three from the RBI,
including the ‘RBI Chairperson’. The draft IFC mentions ‘RBI Chairperson’ and
not ‘RBI Governor’.
2.
Further, the RBI governor will not have veto
power to override interest rate decisions of the MPC.
3.
Suggestions on the monetary policy framework was
first given by the Urjit Patel Committee instituted by current RBI Governor,
Raghuram Rajan. The Patel committee recommended more internal members on the
MPC, with the two external members also being decided by RBI. However, the revised
draft of the IFC has triggered conflict by suggesting more external members who
are nominated by the government.
To view (part 1) of the article, visit the following link:
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