Why regulators can't prevent fraud?

Tue, 7 May Pre-Open

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The main aim of any regulator is to protect the interests of uninformed. Uninformed in this context means people who have less knowledge or information about the product or a service that they buy. It is the duty of the regulator to see to it that the sellers do not take undue advantage of their position and miss-sell products to buyers that are intended to deceive them. The regulations in these regards have to be more stringent especially when it comes to dealing with financial products and services. That's because the buyer in this case has very limited knowledge about the product or a service that is being offered. As such, sellers can easily lure them by offering attractive returns.

Take the case of Saradha chit fund for example which went bust recently. It was a clear case of regulatory lapse. Regulators cannot blame the general public for falling prey to such dubious schemes under the garb of caveat emptor (i.e. buyer beware). In fact, it is their inefficiency which led to such a scam. If there were stringent regulations in place the company would not have been able to accept deposits from public so easily. However, what was more ludicrous was the step taken subsequently to compensate the losses of poor investors. The government intended to use tax payer's money by raising taxes on cigarettes to fund the losses of poor investors!

So, if it is clear that it was poor set of regulations that led to such scams why steps aren't being taken to improve them?

We recently came across an interesting article in a leading daily where the author highlights a few reasons for it. The first one being regulations are not formed with interests of investing public in mind. We cannot agree more. If the interests of general public were kept in mind a company like Saradha would not have been able to raise money so easily escaping the eyes of SEBI.

The second reason which may seem unrealistic but true is that the regulators themselves lack financial literacy. And testament to this is the fact that there are numerous examples where people have lost money in co-operative banks. Poor set of regulations and repetition of such instances make it amply clear that no lessons were learnt from the past mistakes.

However, the biggest problem is inadequate punishment to the perpetrators of such scams and the time taken to convict them. This gives such companies a leeway to cheat innocent investors. We feel that unless the regulators themselves show some intent to protect the investors such instances will continue in the future as well. And investors will pay the price for it.