Stricter curbs on fin cos in line with G-20 norms

NEW DELHI: The government plans tighter regulation of the financial services sector to eliminate conflicts of interest and unhealthy compensation schemes, to meet the benchmarks planned by the group of 20 nations (G-20), department of economic affairs secretary Ashok Chawla told ET.

India is a member of the financial stability board set up by G-20, and would be involved in drafting global benchmarks for financial sector regulation.

���We would set the global regulatory benchmarks, and would also implement them here,��� Mr Chawla said in an interview.
A G-20 statement earlier this month and a report by Reserve Bank of India deputy governor Rakesh Mohan have highlighted the need for addressing two crucial problems plaguing the financial services sector.

First, the incentive structure in financial firms needs to be corrected because the current regimen encourages extreme risk-taking. The second, globally-criticised malaise is that credit rating agencies accept juicy allied contracts from the very companies whose securities they rate.

In fact, regulators point out that bonus payments tied to short-term profits without considering long-term risks exposed the entire global financial system to risk.

A committee set up by the finance ministry to address the conflicts of interest in rating agencies is also looking at the issue of perverse incentives in financial firms that can cause a systemic risk, a member of the panel said.

The government is keen on a globally-harmonised financial regulation to reduce regulatory arbitrage as large financial services firms operate in different countries serving their MNC clients.

The International Organisation of Securities Commissions, which has laid down a model code of conduct for rating agencies, is also modifying its code.