Regulating regulators

One of the central lessons from the financial crisis of 2008 was that the more regulators,the worse for regulation. On Wall Street, they even had a phrase for it: regulatory arbitrage,in which a financial product was redefined ever so slightly so it would be regulated by a slightly more relaxed regulator than otherwise. We in India,as we move forward on financial liberalisation,need to understand these lessons. But,as the spat between SEBI,the securities regulator,and IRDA,which regulates insurance companies,shows,the correct lessons havent been drawn. The spat is essentially this: are unit linked insurance plans,or ULIPs,fit for regulation by the securities regulator,or the insurance regulator?

This is not as knotty a question as it may seem. Certainly,the practice in many countries is that any financial scheme with an insurance component tends to be regulated by the insurance regulator. On the other hand,the truth is that ULIPs basically act as mutual funds,which are subject to the securities regulator. When SEBI,in response to this incontrovertible fact as well as the observation that IRDA wasnt doing very much regulation of ULIPs,moved in,the two regulators got into a public spat. This dispute was bumped up to the finance ministry. The ministry has left it to the judiciary to decide.

For many reasons,that may have been an error. Indeed,the Supreme Court seems to have indicated as much. Aside from the atmosphere created by having two regulatory arms of the state wrangling in the courts,the judicial process could take a long time to sort out the issue and in the interim,consumers receive subpar protection. And,as a bench of the Supreme Court pointed out on Friday,did this unseemly disagreement not make the argument for a super-regulator even more obvious? There might be bureaucratic reasons that slow the government in rationalising regulation in this country. But those cannot be allowed to slow down the process. A single regulator will require parliamentary intervention,and that must come sooner rather than later,with a clear system of checks and balances and of accountability to Parliament a point that the comptroller and auditor general has also made recently. A judicial solution can be little more than a stop-gap arrangement.