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.

other countries, which do not have these structures in place, like south africa, still have to establish requisite structures and appropriate rules. in this regard, as a country with a small, but stable and growing otc market, it is important for us to ensure that differing enforcement dates and approaches, especially in larger jurisdictions, combined with cross - border application of domestic regulations, do not unduly stifle development in our financial markets. some jurisdictions are offering their banks economically - favourable compromises to the basel otc derivatives capital charges, which is to the detriment of our own banks and corporate customers. operational and legal complexities arising from jurisdictional differences, exacerbated by the cross - border nature of otc derivatives, have not yet been resolved. in south africa regulations for otc derivative infrastructures are prescribed in regulations under the recently - implemented financial markets act which is a critical element in our national otc financial reform programme. as for regulatory alignment overall, i would say that south africa has made good progress in adopting and implementing the new international standards and has been an active participant in the relevant fora in which regulatory reform efforts are being addressed. where measures the degree to which an institution ’ s capital is converted to both on - and off - balance sheet exposures. bis central bankers ’ speeches appropriate we have indicated our concerns around the uneven implementation of basel iii across different jurisdictions. 4. regulatory architecture reform even though south africa ’ s financial system weathered the storm of the financial crisis relatively well and is generally commented upon favourably, and has received positive ratings in various surveys, south african authorities felt that there should be no room for complacency, and embarked on a wide - ranging set of reforms to make the financial sector better and safer. our national regulatory architecture is thus undergoing significant transformation. late last year, cabinet approved and released for public comment the financial sector regulation bill. once passed by parliament, the legislation will establish two new regulatory agencies : a prudential authority, in the sarb ; and a market conduct authority that will replace the financial services board. the principles behind the revised structure include integration of the banking and insurance supervisory functions, increased focus on financial stability responsibilities, expansion of supervision to financial markets infrastructures, focused conglomerate supervision, reduced potential for regulatory arbitrage and increased organisational effectiveness. these structures are widely regarded as essential to ensure the fluent supervision of a vastly changing financial landscape. good things it is said, like rome, are