Time to move away from rigid, siloed rules, says RBI

MUMBAI: The central bank has signalled that with regulated entities operating across sectors, financial sector regulators must move away from rigid, siloed rules to a more flexible and coordinated framework. Speaking at IIM Kozhikode on Monday, RBI deputy governor M Rajeshwar Rao said regulators should increasingly adopt principle and outcome-based approaches while strengthening cooperation at home and abroad.

He said that while the RBI, Sebi, Irdai, PFRDA or IFSCA have their distinct regulatory domains, activities of many of their regulated entities overlap. Mechanisms already exist-the Financial Stability and Development Council (FSDC) and the "lead regulator" principle, under which one authority takes charge of supervising an entity with diverse activities. But Rao said coordination must be made more effective if regulators are to keep pace with market evolution.

"This coordination will foster innovation and enable regulated entities to offer services across different domains, while ensuring they have appropriate risk management protocols. It would also help in capping regulatory arbitrage, while simultaneously reducing compliance requirements. Additionally, cooperation among regulators across jurisdictions is essential for sharing insights, expertise, and resources to enable more efficient regulation without compromising quality," Rao said.

Rao's call reflects the challenge of regulating a financial system that is becoming more complex, driven by fintech innovation, cross-sectoral business models and global capital flows.