FSDC panel suggests new dispute resolution mechanism for financial institutions

The high level working group set up by the sub-committee of the Financial Stability and Development Council (FSDC) has emphasised the need for setting up of a single Financial Resolution Authority (FRA) that is institutionally independent of regulators/government.

The working group also suggested a separate comprehensive legal framework providing the necessary powers and tools to resolve all financial institutions irrespective of ownership.

The group recommended the setting up of an early intervention mechanism in the form of a Prompt Corrective Action (PCA) framework with clear trigger levels for regulatory intervention in the early stages and for handing over to the resolution authority for initiating appropriate actions in the last stage.

The working group headed by Anand Sinha, the then deputy governor of the RBI and Arvind Mayaram, secretary, department of economic affairs in the finance ministry as co-chairperson has been set up to suggest measures for extensive strengthening of the resolution regime taking into consideration the structure of Indian financial institutions.

The group has submitted its report to the RBI governor and chairman of the FSDC sub-committee today.

The need for such a dispute resolution mechanism was felt because of the provisions contained in the various Acts governing the respective financial institutions, which empower the respective regulator/supervisor and/or the central government to resolve different types of financial institutions in India once they run into viability problems.

In order to bridge the gaps and develop an effective resolution regime for all financial institutions in line with the key attributes, the group has made wide ranging recommendations taking into consideration the international best practices and work in major advanced jurisdictions as also the recommendations given by the Financial Sector Legislative Reforms Commission (FSLRC).