Finance minister Pranab Mukherjee has called a temporary truce in the raging battle between Sebi and Irda by announcing that Ulips will be regulated by Irda for the time being until the courts make a final and binding call. But this cannot hide a number of troublesome issues that have arisen from the unseemly battle fought in the public domain. The obvious question to ask is why Sebi chose to claim regulatory domain at this point in time when it could have done so many years earlier? Yet the delay in Sebi asserting its regulatory authority cannot be used as an argument against it asserting legitimate authority. Indeed, since Ulips do have a significant equities component, Sebi, as the market regulator, does have the right to regulate them. Sebi would also be right to be concerned about a level-playing field in financial products. After all, the markets regulator has come down heavily on agents charging commission for mutual fund products. This is in the retail investors? interest. But now it is not in the interest of agents to sell mutual fund products?instead they are completely biased into pushing Ulips (which are not dissimilar to mutual funds), which still guarantee them a big commission. This kind of one-sided salesmanship is not in the interest of the retail investor.
Irda, on the other hand, would like to claim exclusive domain over all products with an insurance component and issued by insurance companies. But there is no fundamental need for any regulator to have exclusive domain over a particular product or firm. There will be times when firms and financial products will be regulated by multiple regulators, especially because there are very few completely exclusive domains in modern finance. In fact, it is this overlap of domains that has governments around the world thinking about the need for more inter-regulatory coordination. This is the thinking that guided the announcement of the FSDC in the FM?s Budget speech. It is also the kind of thinking that led to the setting up of the HLCC. The failure of the HLCC to perform its inter-regulatory role has clearly been exposed by this battle. Surely, HLCC should be able to broker a solution, rather than the entire matter being dragged to courts. The Sebi-Irda battle may just be what the fledgling FSDC needed to bolster its case. The other, deeper problem is that many of India?s financial sector laws are old and outdated, and simply out of sync with modern market and regulator conditions. The FSLRC, also promised in the Budget speech, needs to do the urgent task of reforming India?s financial sector laws so that disputes such as these don?t arise in the first place.