Drafting the Indian Financial Code
India’s financial market is deepening with the global interconnectedness and growing complexity in the economy. In such circumstances consumer at times become vulnerable to exploitation by the market forces. In an environment of ill-information and institutionalized mis-selling, consumers do not know where to go and whom to complain. Hence consumer protection spots the top priority of the government.
To address this concern the Financial Sector legislative reforms commission (FSLRC) was constituted under the chairmanship of B N Shrikrishna. The committee along with its several propositions recommended a sector-neutral Financial Redressal Agency (FRA) that will address the grievances against all the financial services. Under this system the consumer would have a single complaint management agency with a low cost and transparent architecture. It would provide a one-stop shop where consumers can carry complaints against all financial firms. It would improve saving atmosphere in the country and people feel free and safe to invest on their savings.
The system would be backed by a proposed Indian Financial code (IFC). IFC may disrupt the regulatory structures already existing, but would create more cohesive, and accountable financial architecture so envisioned. It includes the nine core areas – consumer’s protection, micro-prudential regulation, the resolution cooperation, capital controls, systemic risks, development and distribution, monetary policy, trading and market abuse, and resolution.
Draft Financial Code
The IFC is a non-sectoral, principle-based law bringing together different sectors of the financial system. It addresses the concerns raised by the FSLRC, and to make legal financial framework to address them.
Along with FRA, it proposed multi-latitudinal regulatory mechanism for entry, loss absorption, governance, management and monitoring/supervision of the micro-prudential regulation. It proposes Unified resolution cooperation, dealing with easy exit option for the firm which is at the verge of collapse securing the interest of small consumers. The committee was of the view that the capital controls should be in consonance of ministry of finance and the RBI, where the inbound capital flow to be monitored by the finance ministry while the outbound capital flow by the RBI.
It recommended the formation of financial stability and development council (FSDC) as a statutory organization to reduce the systemic risks for maintaining financial stability. The drafted code includes handing over the responsibility of developing the market infrastructure and process to regulator and redistribution of policies in the hand of finance ministry. It proposes to set a monetary policy committee (MPC) to take decision for the monetary policies of country and better targeting the inflation and inducing the transparency and accountability of the RBI. The draft code includes creation a single unified authority to manage the public debt. It along with proposes to establishes the legal foundation for the securities market, property, and contracts.
The IFC would be a great reform that would have wide ranging impact on the financial sector keeping customer at the focal point. It will overhaul the customer services and protection architecture preventing them from the anomalies of companies and the regulators. It would legitimize the mis-selling of the financial product.
However bringing such architecture requires extremely bold political skill and commitment, because to bring such initiative it requires amending 61 already existing laws related to financial sector.
Such framework would weaken the role of institutions like RBI and IRDA and host of other regulators; hence a pushback to such reform is expected from range of vested interests in the financial sector. Though the keywords remain Public interest with which government should counter every argument.
