UPSC Mains 2013 GS Paper 2 Q8: model answer
The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.
What the question wants
Justify why overlapping financial products make a stronger case for one regulator for securities and insurance.
How to structure it
Justify: argue for the merger, but show you know the counter-case.
- Product overlap
- Problems it creates
- Case for merger
- Cautions
- Verdict
How to think it through
The trigger was the ULIP war of 2010. SEBI banned 14 insurers from selling ULIPs; IRDA told them to carry on; the government had to issue an ordinance. When two referees blow whistles at the same player, the game stops. The examiner wants that example and a sense of where reform went next.
Model answer
In April 2010 SEBI barred 14 insurers from selling Unit Linked Insurance Plans without its registration, while IRDA asked them to continue. An ordinance (later the Securities and Insurance Laws Amendment, 2010) settled the turf war by keeping ULIPs with IRDA.
Why products now overlap
- ULIPs mix insurance with market investment; mutual funds sell 'insurance-linked' SIPs.
- Banks own insurers and asset managers; one customer buys all three products at one counter.
- Pension products sit with PFRDA, adding a third regulator.
Problems of separate regulators
- Regulatory arbitrage: firms design products to fall under the softer regulator.
- Different rules on commissions, disclosure and lock-ins confuse buyers; ULIP commissions were once far higher than mutual fund loads.
- Grievances fall between two stools.
The case for merger
- The Financial Sector Legislative Reforms Commission (2013) proposed a Unified Financial Agency covering securities, insurance, pensions and commodities.
- The Forward Markets Commission's merger with SEBI in 2015 showed that consolidation works.
- The UK's FSA model (1997–2013) and single regulators elsewhere offer lessons.
Cautions
Insurance needs long-horizon solvency supervision, unlike market conduct. Britain split its FSA again in 2013 after the crisis.
A merger, or at least a statutory coordination council with binding product rules, would end arbitrage. The FSDC already exists; it needs teeth. A merged regulator should keep separate wings for prudential and conduct supervision, so that neither the policyholder nor the investor is forgotten.
Draw: Two overlapping circles (SEBI, IRDAI) with ULIP in the overlap, and an arrow to a single 'UFA'.
Keywords, cases and data to drop in
ULIP dispute 2010, regulatory arbitrage, FSLRC 2013, Unified Financial Agency, FMC–SEBI merger 2015, FSDC, twin-peaks model, PFRDA.
Where most answers lose marks
- Arguing only for merger. 'Justify' still rewards one line on why insurance supervision is different.
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Question text as printed in the official UPSC Civil Services (Main) question paper. The model answer is original Battle IAS work; use it to learn structure, not to memorise.
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