SDG 16: Peace, Justice, and Strong Institutions | SDG 8: Decent Work and Economic Growth
Institutions: Reserve Bank of India (RBI) | Securities and Exchange Board of India (SEBI) | Insurance Regulatory and Development Authority of India (IRDAI) | Pension Fund Regulatory and Development Authority (PFRDA)
RBI Deputy Governor Swaminathan J, speaking at the Gatekeepers of Governance Summit, asserted that the existence of regulatory gaps and overlaps in the financial system is rooted in a lack of “intent”, not merely complexity. He argued that when governance intent is strong and “lived in spirit,” overlaps simplify and gaps close; conversely, weak intent leads to a reflex of adding more rules, multiplying work without addressing the real risk.
I. Five Essential Practices for Organizations (Firms):
The Deputy Governor outlined five practices necessary for strengthening internal governance and challenging the status quo:
Boards must own outcomes, not paperwork: Directors must set risk appetite and outcome goals, requiring independent assurance (risk, compliance, audit) to test and report findings.
Independence should be in substance: Independence is the ability to challenge strategy and assumptions. The Chair must actively draw out dissent and keep challenge safe, as many board members hesitate to voice dissent.
Look through the group, not just the entity: In large conglomerates, boards must ring-fence critical entities and enforce strict, transparent related-party policies to prevent a local problem from becoming a group crisis.
Protect and empower the control functions (Three Lines of Defence): Heads of assurance (Chief Risk/Compliance Officer, Internal Audit) must have board access, adequate resources, and their appointment/removal decisions should rest with the board.
Governance gap analysis with real remediation: Organizations must conduct a periodical governance gap analysis to measure policies against industry best practices and ensure frameworks adapt faster than changing business models and technology.
II. Three Principles for Regulators:
Acknowledging that some overlap is inevitable (and can act as a safety net), the RBI proposes three principles for optimising regulation:
Balance entity and activity-based regulation: Regulate the activity wherever it happens, applying consistent rules to similar risks regardless of the provider or label (e.g., if an app offers investment advice, advisory rules apply).
Proportionality: Scale requirements (capital, liquidity, controls) to the risk and complexity of the firm, ensuring small firms do not bear the same burden as large, systemically important players.
Strive towards outcome-based regulation: Where feasible, focus rules on protecting outcomes (fair customer treatment, resilience) rather than locking in specific processes or technologies. Outcome-based rules work best when markets are mature and supervision is strong.
This speech signals a shift in the RBI’s focus toward outcomes-based regulation and the assessment of institutional culture, moving beyond mere prescriptive compliance. The RBI is pushing regulated entities to adopt substantive independence and accountability, while simultaneously demanding regulatory coordination across sectors (SEBI, IRDAI, PFRDA) to apply the principles of proportionality and activity-based regulation to manage systemic risk in complex financial conglomerates.
What are the Three Lines of Defence?→ The Three Lines of Defence is a corporate governance model where business lines own the risk (First Line), Risk Management and Compliance provide challenge and guardrails (Second Line), and Internal Audit provides independent testing of the system (Third Line).
Relevant Question for Policy Stakeholders: What specific collaborative framework must financial regulators (RBI, SEBI, IRDAI) establish to enforce the principle of ‘looking through the group’ in financial conglomerates without creating duplicated compliance burdens?
Follow the full news here: Where Governance Intent is Strong, Regulatory Gaps and Overlaps Fade - RBI