Enforcement: The real reform

In the financial sector, replacing existing regulations with new ones often adds costs without improving outcome

- AJAY TYAGI

No one would disagree that law enforcement in the country’s financial sector needs significant improvement.

What is not adequately appreciated is that effective, timely enforcement action with a deterrent effect against wrongdoers could, at times, obviate the need for regulators to mandate additional regulations and disclosure requirements. Meeting such additional regulatory mandates, which willy-nilly become uniformly applicable to all market participants, imposes costs on law-abiding market players and may not even improve enforcement.

Typically, a regulator handles several functions, regulatory and developmental — some mandated by law and some of its own creation. There could be varying views as to how to prioritise activities, given the capacity and resource constraints of the regulator. However, generally speaking, and in normal circumstances, the developmental roles take precedence. This encourages innovation and new initiatives in market development. Importantly, this also gives better visibility to the regulator, and sends out positive signals about its functioning.

As against this, the regulatory functions, viz, monitoring, inspection, investigation, adjudication and enforcement, are viewed as routine and mundane. What is lost sight of is that without having a robust and deterrent regulatory architecture in place, the development activities are of little use, and may, in fact, prove to be counterproductive at times. Before introducing any new initiative, the regulator ought to be sure of, and see through, how the concomitant enforcement requirements would be met.