Dispute over ULIPs
Ulips are hybrid instruments where a part of the amount paid by sub-scribers is invested and a small portion goes towards insurance pre-mium. SEBI passed an order in April this year saying that regulation of Ulips should be its responsibility rather than IRDA’s, as the funds were mostly invested in stock markets. Sebi had justified it by saying that in some of the products 90% of the money was channelised into markets and not insurance. On April 9, it had banned 14 insurance companies from selling ULIPs without its approval, saying they needed to register with the market regulator. This was opposed by IRDA, which asked insurance compa-nies to ignore the directive. The finance ministry intervened and asked both sides to seek legal recourse to the problem. How was the dispute settled?
The President promulgated an ordinance last month clarifying that life insurance business includes Ulips, which meant that IRDA would con-tinue to regulate Ulips. Four Acts -- RBI Act 1934, Insurance Act 1938, Sebi Act 1992 and Securities Contract Regulations Act 1956-- had to be amended for the purpose. The decision was taken just days before the Supreme Court was scheduled to hear the matter on July 8.
What is the new controversy surrounding the joint committee envisaged by the ULIP ordinance?
In a bid to ensure that similar disputes that may arise in the future are taken care of, the ordinance provided for a joint mechanism headed by the finance minister, two other government representatives and the four regulators, for settling conflicts over hybrid products. What are the RBI’s concerns?
The RBI has said that it the central bank had certain reservations and concerns relating to the ordinance. Reportedly, the central bank feels that the dispute resolution mechanism worked out can undermine the autonomy of the regulators. It is more inclined towards the current mechanism for dispute resolution, --the non-statutory High Level Coordination Committee on Financial Markets chaired by the RBI gover-nor. It is holding discussions with the finance ministry on the issue. What is the way ahead?
The government has to move a bill in Parliament in the monsoon ses-sion of parliament to get the ordinance, a temporarily law, passed into a law. The government can make changes when it moves the bill or allow the ordinance to lapse by not moving the bill altogether. What were fallouts of the dispute?
It prompted the IRDA to look within and reform ULIPs by issuing fresh guidelines. Ulips launched after September 1, 2010 will have lower charges, guaranteed returns, longer lock-in period and larger insurance cover.
CLASH OF THE TITANS
THE dust is yet to settle on a very public spat between market regulator SEBI and insurance watchdog IRDA over regula tion of unit-linked insurance plans, or Ulips. The RBI is op posing a joint committee under the finance minister, envis aged to settle jurisdiction disputes on hybrid products ET brings you the story so far.
Thursday, July 15, 2010
A NEW TURF WAR REGULATORS A WORRIED LOT
A NEW TURF WAR REGULATORS A WORRIED LOT
Sebi against arbiter role for apex financial body
Wants FSDC To Stick To Financial Stability Issues
Editor Shaji Vikraman NEW DELHI
THE Securities and Exchange Board of India (Sebi) does not want the proposed apex financial stability council to set itself up as an arbiter in disputes between regulatory bodies, bringing into sharp focus regulators’ concerns about the government intruding into their domain.
The capital markets regulator has told the government that it does not like the proposed structure of the Financial Stability and Development Council (FSDC) and that the new agency should only concern itself with issues relating to financial stability, an official with knowledge of the development said.
On Monday, Reserve Bank of India (RBI) governor D Subbarao took the unusual step of publicly proclaiming the central bank’s opposition to an ordinance that gives a committee headed by the finance minister the power to resolve disputes between regulatory bodies. The ordinance, which ended a turf war between Sebi and the insurance regulator over unit-linked insurance products, can undercut regulatory autonomy, RBI believes.
The central bank also has some reservations about the FSDC, which will be chaired by the finance minister and comprise two committees—one on inter-regulatory issues with the RBI governor proposed to head it and another on financial stability with the finance secretary at its head. In particular, the apex bank does not like the idea of the finance secretary chairing a panel on financial stability.
Sebi, on the other hand, does not want any committees; it thinks the FSDC should not be hampered by rigid structures and that it should not cramp the style of regulators.
While the government has sought the views of RBI and Sebi regarding the FSDC, neither was consulted before the ordinance was issued last month. The Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority have also been asked to send their views on the government’s FSDC concept note. Officials from both agencies were not available for comment.
CROSSING SWORDS
What's FSDC?
The Financial Stability and Development Council, or FSDC, has been proposed to address inter-regulatory issues and to focus on financial literacy and financial inclusion. It was announced by FM in this year's budget
What's Sebi's take?
Sebi wants FSDC to restrict itself to just addressing issues relating to financial stability and not emerge as an arbiter who rules on regulation of products and other oversight issues.
What's RBI's take?
The central bank feels that in the light of recent global developments, the responsibility for financial stability should optimally rest with it. Its monetary role equips it to manage liquidity more efficiently.
It's also not happy with the suggestion that a committee headed by the finance secretary should chair a committee on financial stability.
What's the take on Ulip ordinance?
While RBI has said the Ulip ordinance has serious implications for regulatory autonomy, Sebi has not reacted Reserve Bank feels it has better sense of market conditions
AJAY Shah, a professor at the National Institute of Public Finance and Policy, said the RBI governor’s concerns over autonomy seem unfounded.
“Internationally, the central bank is given autonomy only for setting short-term interest rates and for deciding on specific transactions. On all other policy issues, it is the government which takes a call as it is accountable to the people," he observed.
But the government was not “fully correct” either when it promulgated an ordinance to settle the Sebi-Irda spat, Mr Shah said.
“There are problems in the world of Ulips, but giving powers to Irda is definitely not a solution. Sebi has a much better history of investor protection.”
Governments defend the decision to oversee financial stability saying it is the taxpayers who pick up the tab when there is a systemic crisis and the government can intervene because it is accountable to Parliament.
But those such as Mr Subbarao are of the view that the monetary authority gets a better sense of market conditions and being the lender of last resort it can provide emergency liquidity support.
Sebi against arbiter role for apex financial body
Wants FSDC To Stick To Financial Stability Issues
Editor Shaji Vikraman NEW DELHI
THE Securities and Exchange Board of India (Sebi) does not want the proposed apex financial stability council to set itself up as an arbiter in disputes between regulatory bodies, bringing into sharp focus regulators’ concerns about the government intruding into their domain.
The capital markets regulator has told the government that it does not like the proposed structure of the Financial Stability and Development Council (FSDC) and that the new agency should only concern itself with issues relating to financial stability, an official with knowledge of the development said.
On Monday, Reserve Bank of India (RBI) governor D Subbarao took the unusual step of publicly proclaiming the central bank’s opposition to an ordinance that gives a committee headed by the finance minister the power to resolve disputes between regulatory bodies. The ordinance, which ended a turf war between Sebi and the insurance regulator over unit-linked insurance products, can undercut regulatory autonomy, RBI believes.
The central bank also has some reservations about the FSDC, which will be chaired by the finance minister and comprise two committees—one on inter-regulatory issues with the RBI governor proposed to head it and another on financial stability with the finance secretary at its head. In particular, the apex bank does not like the idea of the finance secretary chairing a panel on financial stability.
Sebi, on the other hand, does not want any committees; it thinks the FSDC should not be hampered by rigid structures and that it should not cramp the style of regulators.
While the government has sought the views of RBI and Sebi regarding the FSDC, neither was consulted before the ordinance was issued last month. The Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority have also been asked to send their views on the government’s FSDC concept note. Officials from both agencies were not available for comment.
CROSSING SWORDS
What's FSDC?
The Financial Stability and Development Council, or FSDC, has been proposed to address inter-regulatory issues and to focus on financial literacy and financial inclusion. It was announced by FM in this year's budget
What's Sebi's take?
Sebi wants FSDC to restrict itself to just addressing issues relating to financial stability and not emerge as an arbiter who rules on regulation of products and other oversight issues.
What's RBI's take?
The central bank feels that in the light of recent global developments, the responsibility for financial stability should optimally rest with it. Its monetary role equips it to manage liquidity more efficiently.
It's also not happy with the suggestion that a committee headed by the finance secretary should chair a committee on financial stability.
What's the take on Ulip ordinance?
While RBI has said the Ulip ordinance has serious implications for regulatory autonomy, Sebi has not reacted Reserve Bank feels it has better sense of market conditions
AJAY Shah, a professor at the National Institute of Public Finance and Policy, said the RBI governor’s concerns over autonomy seem unfounded.
“Internationally, the central bank is given autonomy only for setting short-term interest rates and for deciding on specific transactions. On all other policy issues, it is the government which takes a call as it is accountable to the people," he observed.
But the government was not “fully correct” either when it promulgated an ordinance to settle the Sebi-Irda spat, Mr Shah said.
“There are problems in the world of Ulips, but giving powers to Irda is definitely not a solution. Sebi has a much better history of investor protection.”
Governments defend the decision to oversee financial stability saying it is the taxpayers who pick up the tab when there is a systemic crisis and the government can intervene because it is accountable to Parliament.
But those such as Mr Subbarao are of the view that the monetary authority gets a better sense of market conditions and being the lender of last resort it can provide emergency liquidity support.
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