so if we move to a principle based approach for legislation ), and where the tribunals will have a significant amount of learning to do, the encouragement to appeal could paralyze the system and create distortions, as needed regulations are held up and participants exploit loopholes. finally, in every country, a healthy respect for the regulator serves to keep participants on the straight and narrow. in a developing country, where private behaviour is less constrained by norms or institutions, this is especially important. but to the extent that private parties with bis central bankers ’ speeches their high priced lawyers can check the regulator, that healthy respect dissipates. so the final danger is that the regulator could become a paper tiger, and lose its power of influencing good behaviour, even in areas that are not subject to judicial review. am i arguing that no checks and balances are needed? certainly not! but there are already checks and balances in place, including review by constitutional courts like high courts through writ petitions. senior officers of the regulator are appointed, and can be removed, by the government. the fslrc recommends an annual report to parliament, as well as regular discussions with parliamentarians. these are good suggestions, which would add to oversight. some could argue that sebi is already under the securities appellate tribunal, so why not bring other regulators under a tribunal? so long as the tribunal only questions administrative decisions such as the size and proportionality of penalties, i do not see a problem. but if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator like the rbi, which has to constantly make judgments intended to minimize systemic risk, will be greatly impaired. indeed, because of the tendency of any new organization to overreach to justify its existence, one should be careful about tying the financial regulator with further judicial oversight. better to revisit these issues a few years from now when both regulation and oversight mechanisms are better developed. finally, we do understand that if the regulator wants to be trusted, it has to display the greatest competence and integrity. the rbi, despite the general deterioration in the probity of public institutions, has maintained a reputation for integrity. we cannot be complacent about this and have to work on maintaining a culture, as well as service conditions, that encourage integrity. we also have to work continuously on upgrading our capabilities so we match the fast pace of change in the financial sector. regulatory architecture another area where there are tensions in the

raghuram rajan : financial sector legislative reforms committee report ( fslrc ) – what to do and when? talk by dr raghuram rajan, governor of the reserve bank of india, at the first state bank “ banking and economic conclave ”, mumbai, 17 june 2014. * * * the financial sector legislative reforms committee ( fslrc ) report is one of the most important, well researched, as well as well - publicized reports in indian financial history. it not only lays out the functions of the financial sector and how it should be structured, but also how legislation and regulation governing it ought to look like. the authors of this report truly have to be commended for their national service. the report ’ s influence will be felt for many years to come. there is much to like and agree with in the report. in laying out the need for consumer protection, raising the issue of whether products sold are suitable for the target customer, and putting the onus on the financial institution to determine suitability, the report has forced regulators to review their consumer protection frameworks. we at the rbi are indeed engaged in such an exercise, informed by the valuable guidelines in the fslrc report. there is more of great value. the fslrc ’ s emphasis on the need for a clear monetary framework culminated in the dr. urjit patel committee report, which will guide our thinking in the years to come. similarly, its focus on creating new institutions like the financial resolution authority, which will help us resolve distressed financial institutions at minimum cost to the economy, is much needed. i could go on. but i come here not to praise the fslrc report, but to debate some of it. i will argue that there are two fundamental areas of tension. one is the oversight of regulators. the fslrc suggests laws that do not micromanage, giving regulators the freedom to fill in the details in consonance with the changing needs of the economy. at the same time, the fslrc wants to check and balance the activities of regulators through judicial oversight. too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws. we need to find a proper balance, and the balance may vary with our level of development. i worry we have not thought through this fully. the second area of tension is the appropriate size and scope of regulators. the fslrc ’ s recommendations seem somewhat schizophrenic here.