The idea of setting up a unified financial sector regulatory body by a high level committee may not find a keen supporter in Reserve Bank of India governor Raghuram Rajan who has called it “somewhat schizophrenic”. In addition, he has also slammed the proposal to open up all regulatory decisions to a judicial review saying that the move could reduce regulators to a “paper tiger”, rendering them ineffective.

The above mentioned ideas along with a few others were mooted by the financial sector legislative reforms commission (FSLRC) in its report submitted in 2012. The FSLRC, set up in 2011 to review the regulatory structure in the financial sector, had recommended the setting up of a ‘super regulator’ for regulating the capital markets, insurance, commodities futures trading and pension funds. In addition it has also proposed that this unified regulator will manage internal capital flows and regulate bonds, currencies and derivatives trading, thus restricting the apex bank to purely look after monetary policy and functioning of banks.

The committee’s idea of setting up a financial sector appellate tribunal to review regulatory decisions has also been discouraged by Rajan who feels that this may “undermine the very purpose of a regulator”. Rajan argues that the setting up of a tribunal would mean constant interference in the functioning of regulatory bodies and that “people (will) trust the tribunal’s judgment but not that of the regulator”.

According to Rajan, “...to the extent that private parties with their high-priced lawyers can check the regulator, that healthy respect dissipates. So the final danger is that the regulator could become a paper tiger, and lose its power of influencing good behaviour, even in areas that are not subject to judicial review.”

Rajan added that second-guessing all regulatory decisions could also mean delay in the decision-making process which could bring the system to a standstill. “....a lot of regulatory action stems from the regulator exercising sound judgment based on years of experience. In doing so, it fills in the gaps in laws, contracts, and even regulations. Not everything the regulator does can be proven in a court of law.”

Taking the example of the securities appellate tribunal (SAT), which mostly questioned administrative decisions such as the size of penalties imposed by a regulator, etc, there is no problem. “But if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator like the RBI, which has to constantly make judgments intended to minimise systemic risk, will be greatly impaired,” Rajan said.