Financial Regulation Should Be More Nimble

Markets and insurance regulators should consider the expected outcomes of their moves and correct for unforeseen effects

- GN Bajpai

Liberalisation and the free play of market forces warrants a monitoring authority empowered to lay down the ground rules to guide the behaviour of participants. The monitoring authorities so constituted are known as regulatory bodies.

Liberalisation of various industries, one after the other, has led to the creation of host of regulatory bodies across geographies with an open-market architecture. A regulator is a ‘mini-state’ with quasi-legislative, executive and quasi-judicial responsibilities. Legislation, including subordinate legislation, is an outcome of policy-think. Regulatory policies so conceived must lead to the efficacy of the markets and efficient outcomes.

Liberal markets enable greater individual freedom culminating in higher creativity and innovation. However, the ingenuity of market participants often unleashes exploitative approaches to profits arising out of kinks in the regulatory process. The watchful eyes of the authority must enable it to take notice and deal with market misconduct appropriately, prevent injury to other participants and maintain the rhythm of the market.

Flawed adherence

Multiplicity of misconduct and changing dynamics of the market have led to complex web of regulatory framework, which is becoming craftier by the day. Adherence to regulatory direction sometimes distorts the market and obstructs free play. It is, therefore, important for the regulatory authority to assess the propensity of enforcement before laying the regulation. The authority should also assess the possible consequences and ring-fence with safeguards to minimise the adverse impact. It will do well to recall, some widely known examples from our financial markets in this context.