Include financial sector in proposal to make regulators accountable

The government plans to enact a law to oversee regulators and also merge regulatory agencies. This is welcome, given that there is no mechanism now to hold regulators to account without infringing their independence from the executive.

However, the proposed law excludes financial sector regulators. That’s not correct. It should cover all regulators to make their functioning transparent and also prevent regulatory capture: a process wherein regulators act in ways that benefit one or more of the entities they are charged with regulating.

Regulatory agencies in the financial sector should also be merged. There can be two regulators: a macroprudential regulator and another regulator to cover market transactions. The RBI fits the bill as a macro-prudential regulator. The other unified regulator can oversee the entire gamut of products including stocks, bonds, insurance, pensions, commodities, derivatives, etc.

The proposed law also seeks to make regulators accountable to Parliament and have their books scrutinised by the Comptroller and Auditor General of India. This makes eminent sense. Laws and policies are made by the government, and their articulation and compliance are left to regulators. And these agencies can function independently only when they are made accountable to Parliament, rather than to the government.

Regulators should also have structured interactions and periodically report to Parliament, much like the US Federal Reserve that is accountable to the Congress and reports twice a year on its working. The selection process of regulators also needs an overhaul.

A committee of Parliament, comprising of members of the ruling party and the Opposition, should ratify the appointment of independent regulators once the government selects them.

Ideally, the finances of regulatory agencies should come from the sectors they regulate and not from the Budget. The government should also drop the plan to issue directions to a regulatory commission with prior approval of the concerned minister and the Prime Minister. This goes against the grain of reform.