Consultative regulation-making that should go further

‘Piecemeal reforms by individual regulators may not be sufficient to ensure consistent adherence to good regulatory practice’
| Photo Credit: Reuters

In May this year, the Reserve Bank of India (RBI) issued a policy framework for how it will publish regulations, directions, guidelines and notifications. This follows a similar move by the Securities and Exchange Board of India (SEBI), in February, which published regulations setting out the procedure it would follow to issue regulations.

Regulators such as the Reserve Bank of India (RBI) and SEBI, have been created by Acts of Parliament and have quasi-legislative powers. Within this context, strong procedural safeguards and robust checks and balances are essential to uphold the rule of law. The recent frameworks, which outline the procedures that the RBI and SEBI must follow when making law, are a welcome start. When proposing any new regulations or amendment to existing regulations, the RBI will now conduct “impact analyses” and SEBI will state the “regulatory intent and objectives”. Both regulators will also invite public comments for 21 days. Moreover, they will now periodically review their own regulations.

These reforms signal a welcome shift toward more transparent and consultative regulation-making. Yet, they can, and should go further. Two additions will make these processes more robust, and ensure greater transparency and accountability. First, regulators should clearly identify the economic rationale for their interventions, and second, they should institute mechanisms to ensure accountability for periodic reviews and responses to public comments.

The issue of market failure

The RBI’s impact analyses and SEBI’s statements of objectives must be grounded in economic rationale that identifies the problem that their proposed regulation will address. In 2013, the Financial Sector Legislative Reforms Commission (FSLRC) emphasised that “laws must be defined in terms of their economic purpose”. Regulatory practices in other jurisdictions also support the FSLRC’s suggestion.

For example, executive memoranda in the United States mandate that regulators undertake a cost-benefit analysis before proposing or adopting a regulation. Regulators there must also ensure the “least burden on society”, adopt an approach that maximises benefits, and assess the feasibility of alternatives to direct regulation. As another example, under the European Union’s Better Regulation Framework, impact assessments involve identifying the problem, potential solutions and their impact, and mechanism for monitoring and evaluating the results.

Currently, RBI’s framework calls for “impact analysis” considering “economic environments”. SEBI must explain its objectives. However, neither are explicitly required to provide the economic rationale of any proposed regulation or identify the underlying market failure. This can be contrasted with the framework implemented by the International Financial Services Centres Authority (IFSCA), which must state the issue that its proposed regulation seeks to address.

Financial sector regulators such as the RBI and SEBI should: identify the market failure that necessitates regulatory intervention; demonstrate how the proposed regulation will address such failure; conduct a cost-benefit analysis to demonstrate the expected impact of the proposed regulation, and formulate a monitoring and evaluation framework to assess the impact of the regulation.

Strengthening accountability

The track records of the regulators in consultative regulation-making are not encouraging. It was found by two researchers that between June 2014 and July 2015, the RBI had sought public comments on 2.4% of its circulars while SEBI had done the same on less than half of its regulations. Even though this suggests that there are limited opportunities for stakeholders to submit their views on proposed regulation, one is optimistic that this will now change. However, the regulators must be transparent in their approaches toward consultative regulation-making. The reporting of the following information on an annual basis will strengthen accountability: the number of public consultations vis-à-vis the number of proposed regulations or amendments; responses received; suggestions that have been accepted and rejected; rationale for acceptance and rejection; the impact of public feedback on the proposed regulation or amendment, and, finally, all associated timelines. This is by no means an exhaustive list. Some of this information can be found in the agendas for SEBI’s board meetings. But typically, as in SEBI’s latest board meeting, the summary of public comments is “excised for reasons of confidentiality”.

In addition, the RBI and SEBI must define the intervals at which they will review their regulations. This is relevant in the context of promises toward deregulation. Once again, this is may be contrasted with the IFSCA’s framework, which mandates a review every three years. Regulators should, at pre-defined and reasonably frequent intervals, assess whether current regulations are achieving their intended objectives and addressing the problems they were designed to solve.

A hurdle

Good regulatory practice warrants meaningful justification for regulatory intervention, and the RBI and SEBI have taken the initial steps in that direction. Notably, limited state capacity is a significant hurdle to implementing regulatory impact assessments and consultative practices.

Moreover, piecemeal reforms by individual regulators may not be sufficient to ensure consistent adherence to good regulatory practice. Parliament could contemplate enactment of a law, similar to the Administrative Procedure Act in the United States, with standardised procedures for regulation-making, which includes impact analysis, public consultation and periodic review.

The United Kingdom and Canada have issued guidelines for regulation-making by agencies. Such an approach would institutionalise transparency and accountability for all regulators in India.

Natasha Aggarwal is a Senior Research Fellow at TrustBridge Rule of Law Foundation. The views expressed are personal