FINANCIALSTABILITY AND DEVELOPMENT COUNCILThe regulation of thefinancial sector is an imperative service for ensuring strong and competentfinancial system in the economy. There are different regulators for diversesegments of financial sectors inter alia, the Reserve Bank of India forcommercial banks and Non Banking Financial Companies, Securities and ExchangeBoard of India for capital markets.To ensure betterefficiency and also to evade overlapping of functions, it is of vitalimportance that there be co-ordination amongst these regulators. For this, theGovernment has formed the Financial Stability and Development Council,a super regulatory body for regulating financial sector which iscrucial for ensuring a healthy and efficient financial system in the economy.The idea to create FSDCwas first mooted by the Raghuram Rajan Committee on Financial SectorReforms in 2008. However, it was the tussle between SEBI and IRDA which led tocreation of FSDC in 2010. EVENTSTHAT LED TO FORMATION OF FSDC1.

      GlobalCrisis of 2008The2008 financial crisis was the worst economic disaster since the Great Depression of 1929.  Following the collapse of Lehman Brothers inmid-September 2008, there was a full-blown meltdown of the global financialmarkets. It created a crisis of confidence that led to the seizure ofinter-bank market and had trickle-down effect on trade financing in theemerging economies. Together with slackening global demand and decliningcommodity prices, it led to fall in exports, thereby transmitting financialsector crisis to the real economy. Countries with export-led model of growthand that depended upon commodity exports, were more severely affected. Theimpact on Indian economy was less severe because of lower dependence of theeconomy on export markets and the fact that a sizeable contribution to GDP isfrom domestic sources. 2.      Indiajoins “Financial Stability Board”The Financial StabilityBoard (FSB) is an international body that monitors and makesrecommendations about the global financial system.

It was establishedafter the 2009 G20 London summit in April2009 as a successor to the Financial Stability Forum (FSF)The FSB promotes international financial stability; it does so by coordinatingnational financial authorities and international standard-setting bodies asthey work toward developing strong regulatory, supervisory and other financialsector policies. It fosters a level playing field by encouraging coherentimplementation of these policies across sectors and jurisdictions.The FSB, working through itsmembers, seeks to strengthen financial systems and increase the stability ofinternational financial markets. The policies developed in the pursuit of thisagenda are implemented by jurisdictions and national authorities. In 2010,India joined the FSB. 3.

      Disputebetween SEBI and IRDA over jurisdiction of ULIPsUnitLinked Insurance Policy (ULIP) is a sort of goal-based financial solution whichcombines the safety of insurance protection with wealth creation opportunities.A portion of the investment made by a customer in ULIPs goes towards providingthe insurance protection and residual portion is invested in a fund which inturn invests the money in stocks / bonds. Thusthe protection element and savings element are distinguishable in ULIPs andthey provide flexibility to the investors.

Thus as seenabove, ULIPs have elements of both Insurance and Investment. WhilstInvestments, Mutual Funds and other collective schemes are managed by SEBI,Insurance comes under the purview of the Insurance Regulatory and DevelopmentAuthority.            In December 2009 and January2010, show cause notices were issued by SEBI to 14 insurance companies askingthem why action should not be initiated against them for issuing investmentproducts without SEBI’s permission. Prashant Saran, SEBIs whole-time member, onApril 09, 2010 ordered a ban on ULIP products by 14 insurers.SEBIs maincontention was that since a part of ULIPs was investing in nature, it should beregulated by SEBI.

It was also seen that insurance agents received handsomecommissions (as high as 30%) for selling ULIPs and so the markets were filledwith these products which essentially mimicked mutual funds. Thus SEBI was ofthe opinion that its guidelines be followed for sale of ULIPs and so it issuedshow cause notice to 14 companies on sale of ULIPs without obtaining its priorsanction.IRDA’s responsewas that the jurisdiction of ULIPs did not lie with SEBI.

It thus ignoredSEBI’s order and directed the continuance of sale of ULIPs.The UnionFinance Ministry had to butt in and restore status quo after meeting both SEBIand IRDA officials. This paved way towards establishment of the Financial andStability Development Council by the then Finance Minister of India, PranabMukherjee.  COMPOSITION OF FSDC The council will act as aco-ordination agency between the various financial sector regulators- the RBI,SEBI, IRDA and the PFRDA. This Council would monitor macro-prudentialsupervision 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 asthe Chairman of the council)·        Heads of financial sector Regulators(RBI, SEBI, PFRDA, IRDA & FMC {now with SEBI}) Finance Secretary and/orSecretary, Department of Economic Affairs,·        Secretary, Department of FinancialServices, and,·        Chief Economic Adviser.

 The Council can invite experts toits meeting if required. The FSDC Secretariat is in the Department of EconomicAffairs.FUNCTIONSOF FSDC 1.     Financial StabilityOne of the keyfunctions of this Council is to ensure financial stability and efficiency inthe economy. From a macro prudential perspective, financial stability could bedefined as a situation in which the financial sector provides vital services tothe real economy exclusive of any discontinuity. Thus financial institutions independentlyand collectively should be able to convey their functions appropriately,withstanding peripheral shocks and avoiding internal weaknesses.

 2.     Financial Sector DevelopmentThe developmentof financial sector is imperative for developing economies as it contributesgreatly to the GDP of the nation. It is a part of the private sectordevelopment strategy to stimulate economic growth. 3.     Inter Regulatory CoordinationThe main reasonfor formation of FSDC was to regulate the SEBI and the IRDA. Thus inter bodyregulation if one of the core functionalities of the Council. FSDC was formedto bring greater synchronization among financial market regulators. 4.

     Financial LiteracyFinancialliteracy is the ability to use knowledge and skills tomanage financial resources effectively for a lifetimeof financial well-being. Financial literacy, and education, plays acrucial role in financial inclusion, inclusive growth and sustainableprosperity 5.     Financial InclusionFinancial inclusion is emergingas a new paradigm of economic growth that plays major role in driving away thepoverty from the country. It refers to delivery of banking services to massesincluding privileged and disadvantaged people at an affordable terms andconditions.

Financial inclusion is important priority of the country in termsof economic growth and advancement of society. 6.     Macro-prudent supervision of the economy includingfunctioning of large conglomeratesWithoutprejudice to the autonomy of regulators, this Council would monitor macroprudential supervision of the economy, including the functioning of largefinancial conglomerates. It will address inter-regulatory coordination issuesand thus spur financial sector development. It will also focus on financialliteracy and financial inclusion. What distinguishes FSDC from other suchsimilarly situated organizations across the globe is the additional mandategiven for development of financial sector.

 7.      Strengtheningthe regulation of Credit Rating AgenciesFSDC alsodeliberated on strengthening the regulation of Credit Rating Agencies (CRAs)8.     Computer Emergency Response Team in Financial Sector(CERT-Fin)FSDC took noteof the developments and progress made in setting up of Computer EmergencyResponse Team in the Financial Sector (CERT-Fin) and Financial Data ManagementCentre.

It also discussed measures for time bound implementation of theinstitution building initiative. TheFSDC Sub-Committee Thecouncil has a Subcommittee chaired by the Governor of the RBI, which willreplace the existing High-Level Coordination Committee on Financial Markets. Itmeets more often than the full Council.

All the members of the FSDC are alsothe members of the Sub-committee. The additional members include all DeputyGovernors of the RBI and Additional Secretary, DEA, in charge of FSDC. Otherwings within the FSDC Thereare few other regulatory wings within the FSDC subcommittee are:·        theInter-regulatory technical group ·        TechnicalGroup on financial inclusion and financial literacy ·        Inter-regulatoryforum for monitoring financial conglomerates ·        EarlyWarning Group,·        WorkingGroup on resolution regime for financial institutions and·        MacroFinancial and Monitoring Group   Thus,the Financial Stability and Development Council was set up as an apex levelforum with a view of strengthening and institutionalizing the mechanism formaintaining financial stability, enhancing inter-regulatory coordination andpromoting financial sector development.    

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