FINANCIAL 2008. However, it was the tussle between

FINANCIAL
STABILITY AND DEVELOPMENT COUNCIL

The regulation of the
financial sector is an imperative service for ensuring strong and competent
financial system in the economy. There are different regulators for diverse
segments of financial sectors inter alia, the Reserve Bank of India for
commercial banks and Non Banking Financial Companies, Securities and Exchange
Board of India for capital markets.

To ensure better
efficiency and also to evade overlapping of functions, it is of vital
importance that there be co-ordination amongst these regulators. For this, the
Government has formed the Financial Stability and Development Council,
a super regulatory body for regulating financial sector which is
crucial for ensuring a healthy and efficient financial system in the economy.

The idea to create FSDC
was first mooted by the Raghuram Rajan Committee on Financial Sector
Reforms in 2008. However, it was the tussle between SEBI and IRDA which led to
creation of FSDC in 2010.

 EVENTS
THAT LED TO FORMATION OF FSDC

1.      Global
Crisis of 2008

The
2008 financial crisis was the worst economic disaster since the Great Depression of 1929.  Following the collapse of Lehman Brothers in
mid-September 2008, there was a full-blown meltdown of the global financial
markets. It created a crisis of confidence that led to the seizure of
inter-bank market and had trickle-down effect on trade financing in the
emerging economies. Together with slackening global demand and declining
commodity prices, it led to fall in exports, thereby transmitting financial
sector crisis to the real economy. Countries with export-led model of growth
and that depended upon commodity exports, were more severely affected. The
impact on Indian economy was less severe because of lower dependence of the
economy on export markets and the fact that a sizeable contribution to GDP is
from domestic sources.

 

2.      India
joins “Financial Stability Board”

The Financial Stability
Board (FSB) is an international body that monitors and makes
recommendations about the global financial system. It was established
after the 2009 G20 London summit in April
2009 as a successor to the Financial Stability Forum (FSF)
The FSB promotes international financial stability; it does so by coordinating
national financial authorities and international standard-setting bodies as
they work toward developing strong regulatory, supervisory and other financial
sector policies. It fosters a level playing field by encouraging coherent
implementation of these policies across sectors and jurisdictions.

The FSB, working through its
members, seeks to strengthen financial systems and increase the stability of
international financial markets. The policies developed in the pursuit of this
agenda are implemented by jurisdictions and national authorities. In 2010,
India joined the FSB.

 

3.      Dispute
between SEBI and IRDA over jurisdiction of ULIPs

Unit
Linked Insurance Policy (ULIP) is a sort of goal-based financial solution which
combines the safety of insurance protection with wealth creation opportunities.
A portion of the investment made by a customer in ULIPs goes towards providing
the insurance protection and residual portion is invested in a fund which in
turn invests the money in stocks / bonds.

Thus
the protection element and savings element are distinguishable in ULIPs and
they provide flexibility to the investors.

Thus as seen
above, ULIPs have elements of both Insurance and Investment. Whilst
Investments, Mutual Funds and other collective schemes are managed by SEBI,
Insurance comes under the purview of the Insurance Regulatory and Development
Authority.
            In December 2009 and January
2010, show cause notices were issued by SEBI to 14 insurance companies asking
them why action should not be initiated against them for issuing investment
products without SEBI’s permission. Prashant Saran, SEBIs whole-time member, on
April 09, 2010 ordered a ban on ULIP products by 14 insurers.

SEBIs main
contention was that since a part of ULIPs was investing in nature, it should be
regulated by SEBI. It was also seen that insurance agents received handsome
commissions (as high as 30%) for selling ULIPs and so the markets were filled
with these products which essentially mimicked mutual funds. Thus SEBI was of
the opinion that its guidelines be followed for sale of ULIPs and so it issued
show cause notice to 14 companies on sale of ULIPs without obtaining its prior
sanction.

IRDA’s response
was that the jurisdiction of ULIPs did not lie with SEBI. It thus ignored
SEBI’s order and directed the continuance of sale of ULIPs.

The Union
Finance Ministry had to butt in and restore status quo after meeting both SEBI
and IRDA officials. This paved way towards establishment of the Financial and
Stability Development Council by the then Finance Minister of India, Pranab
Mukherjee.

 

 

COMPOSITION OF FSDC

 

The council will act as a
co-ordination agency between the various financial sector regulators- the RBI,
SEBI, IRDA and the PFRDA. This Council would monitor macro-prudential
supervision of the economy, including the functioning of large financial conglomerates,
and address inter-regulatory coordination issues.

 

The FSDC shall consist of:

 

·        
Finance Minister (who shall act as
the Chairman of the council)

·        
Heads of financial sector Regulators
(RBI, SEBI, PFRDA, IRDA & FMC {now with SEBI}) Finance Secretary and/or
Secretary, Department of Economic Affairs,

·        
Secretary, Department of Financial
Services, and,

·        
Chief Economic Adviser.

 

The Council can invite experts to
its meeting if required. The FSDC Secretariat is in the Department of Economic
Affairs.

FUNCTIONS
OF FSDC

 

1.     
Financial Stability

One of the key
functions of this Council is to ensure financial stability and efficiency in
the economy. From a macro prudential perspective, financial stability could be
defined as a situation in which the financial sector provides vital services to
the real economy exclusive of any discontinuity. Thus financial institutions independently
and collectively should be able to convey their functions appropriately,
withstanding peripheral shocks and avoiding internal weaknesses.

 

2.     
Financial Sector Development

The development
of financial sector is imperative for developing economies as it contributes
greatly to the GDP of the nation. It is a part of the private sector
development strategy to stimulate economic growth.

 

3.     
Inter Regulatory Coordination

The main reason
for formation of FSDC was to regulate the SEBI and the IRDA. Thus inter body
regulation if one of the core functionalities of the Council. FSDC was formed
to bring greater synchronization among financial market regulators.

 

4.     
Financial Literacy

Financial
literacy is the ability to use knowledge and skills to
manage financial resources effectively for a lifetime
of financial well-being. Financial literacy, and education, plays a
crucial role in financial inclusion, inclusive growth and sustainable
prosperity

 

5.     
Financial Inclusion

Financial inclusion is emerging
as a new paradigm of economic growth that plays major role in driving away the
poverty from the country. It refers to delivery of banking services to masses
including privileged and disadvantaged people at an affordable terms and
conditions. Financial inclusion is important priority of the country in terms
of economic growth and advancement of society.

 

6.     
Macro-prudent supervision of the economy including
functioning of large conglomerates

Without
prejudice to the autonomy of regulators, this Council would monitor macro
prudential supervision of the economy, including the functioning of large
financial conglomerates. It will address inter-regulatory coordination issues
and thus spur financial sector development. It will also focus on financial
literacy and financial inclusion. What distinguishes FSDC from other such
similarly situated organizations across the globe is the additional mandate
given for development of financial sector.

 

7.     
 Strengthening
the regulation of Credit Rating Agencies

FSDC also
deliberated on strengthening the regulation of Credit Rating Agencies (CRAs)

8.     
Computer Emergency Response Team in Financial Sector
(CERT-Fin)

FSDC took note
of the developments and progress made in setting up of Computer Emergency
Response Team in the Financial Sector (CERT-Fin) and Financial Data Management
Centre. It also discussed measures for time bound implementation of the
institution building initiative.

The
FSDC Sub-Committee

 

The
council has a Subcommittee chaired by the Governor of the RBI, which will
replace the existing High-Level Coordination Committee on Financial Markets. It
meets more often than the full Council. All the members of the FSDC are also
the members of the Sub-committee. The additional members include all Deputy
Governors of the RBI and Additional Secretary, DEA, in charge of FSDC.

 

Other
wings within the FSDC

 

There
are few other regulatory wings within the FSDC subcommittee are:

·        
the
Inter-regulatory technical group

·        
Technical
Group on financial inclusion and financial literacy

·        
Inter-regulatory
forum for monitoring financial conglomerates

·        
Early
Warning Group,

·        
Working
Group on resolution regime for financial institutions and

·        
Macro
Financial and Monitoring Group

 

 

Thus,
the Financial Stability and Development Council was set up as an apex level
forum with a view of strengthening and institutionalizing the mechanism for
maintaining financial stability, enhancing inter-regulatory coordination and
promoting financial sector development.