fencing consumer protection within the compliance function. instead, the entire institution – right from the board to the frontline managers – have to be responsive to this objective. bis central bankers ’ speeches need for a credible and effective regulatory regime 9. the presence of a credible and effective regulatory regime acts as a source of confidence and comfort in the financial system. this helps in attracting more participants to the market place, thereby making the financial system inclusive and efficient. the experience from the global financial crisis is that self - regulation, often, does not work. the presence of a strong, intrusive and hands - on regulator / supervisor gives the confidence that markets will operate as per sound principles and would be free from unfair and unethical practices. this trust forms the basis of functioning of the entire financial system and any dent in this trust can have a significant destabilizing influence. the series of measures initiated by global standard setting bodies and individual regulators in the aftermath of the financial crisis clearly underscore the imperative of having a credible and effective regulatory regime. consequently, the effort is on to leverage these regulatory initiatives to rebuild trust and confidence in the global financial system. it is now globally accepted that in order to earn the trust of the consumers / market participants, it is important that the regulatory system is seen and perceived to be fair and transparent. twin peaks approach to financial sector regulation and supervision 10. the pre - crisis financial sector regulatory and supervisory architecture across various jurisdictions placed overarching emphasis on the financial strength and soundness of banks. commentators generally presumed that there were strong synergies between prudential regulation and consumer protection and, therefore, an integrated supervisor could take care of both objectives. however, the crisis highlighted that the integrated supervisors are more likely to give precedence to safety and soundness mandates, as these are closely intertwined with financial stability, rather than focusing on consumer protection issues. the twin peaks approach helps in resolving this conflict. the market conduct regulator is focused on ensuring that the institutions design the products and services in line with the customers ’ needs, maintain integrity of the markets and conduct their businesses keeping the primacy of the customers ’ interests in the forefront. product design, financial innovation and consumer protection 11. one of the reasons for the perpetuation of the global financial crisis was that financial innovation resulted in creation of products that were not suited to consumer requirements. also, these products had risk profiles that were not fully understood by consumers or financial market participants. the crisis was an instance

structured investment vehicles ( sivs ) and conduits, “ runs ” on mmfs and a sudden reappraisal of the terms on which securities lending and repos were conducted. 37. now you may say “ yes, we agree that the nbfcs need to be regulated. but, why are you saying that there are challenges? don ’ t you have the law enabling you to regulate them? ” 38. yes, we have the law. and it has evolved over the time. the challenges today are as follows : 39. first, there are law related challenges i. there are a number of companies that are registered as finance companies, but are not regulated by the reserve bank, ii. there are unincorporated bodies who undertake financial activities and remain unregulated, iii. there are incorporated companies and unincorporated entities illegally accepting deposits, iv. there are entities who camouflage deposits in some other names and thus illegally accepting deposits. the law as it stands today is inadequate to deal with these issues. in order to correct these and initiate action against violations, we need to bring in suitable amendments to the statutory provisions. reserve bank is working with the government for such improvements in the law. 40. secondly, as the entities, especially the unincorporated ones, can sprung in any nook and corner of the country and can operate with impunity unnoticed, but endangering their customers ’ interest, we need arrangements and structured for effective market intelligence gathering. the reserve bank is restructuring its organisational setup, especially in its regional offices, for gathering market intelligence. 41. thirdly, empowering law and gathering intelligence by themselves are not sufficient. enforcement of the law is a challenge. this is primarily because of the various agencies involved in regulating the non - banking financial activities of entities. right from the central government ministries like finance and corporate affairs, agencies like cbi and fiu - ind, regulatory agencies like the reserve bank, sebi, the registrar of companies, the state government agencies like the police and others, all have to share information and coordinate and cooperate to bring in an effective, timely and unified enforcement of the law. the reserve bank ’ s state level coordination committees ( slcc ) are being strengthened and a national level coordination committee is also being considered. 42. fourthly, as was mentioned earlier, world over there is an increasing demand that the shadow banks be brought under tighter regulations. g - 20 has already expressed it as a mission to be achieved by 2015. in