The Bureaucracy and the Financial System

The government’s current approach to regulatory oversight of the financial system is indicative of the civil services bureaucracy seeking to acquire complete control of regulatory processes in the sector. First, the union finance minister announced in the 2010-11 budget speech the constitution of the Financial Stability and Development Council (FSDC) with himself as the chairman – a political arrangement which hardly has any parallel in the world. Such an approach would deprive the superregulatory body of that universal principle of being independent and free from political and bureaucratic influences. History has shown that the institutional arrangements headquartered in treasuries and finance ministries stifle professional independence and freedom. That the government’s lackadaisical attitude towards regulatory institutions is entirely influenced by the selfish interests of the bureaucracy is evident from the manning of those institutions, with all regulatory bodies now headed by serving or retired members of the civil services.

Now, before the FSDC has been officially constituted, the government has taken the opportunity of a rift between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) on the jurisdiction over unit-linked insurance plans (ULIPS), a hybrid product embracing the character of both insurance and investment in securities, to institute a “Joint Committee” to address any difference of opinion that may arise on hybrid or component instruments transgressing the defined market boundaries. The composition of the proposed Joint Committee, as promulgated in a presidential ordinance, appears to be a precursor of the future shape of the FSDC. Apart from the union finance minister as chairman and the chiefs of four regulatory bodies (the Reserve Bank of India, SEBI, IRDA, and the Pension Fund Regulatory and Development Authority) as members, there will be two key member representatives from the Union Ministry of Finance – the finance secretary and the secretary (financial services).