The Reserve Bank of India (RBI) governor Raghuram Rajan does not appear to think financial services need reform. In a recent speech, he highlighted what he believes are "areas of tension" in the report of the Financial Sector Legislative Reforms Commission FSLRC ).The FSLRC made recommendations to modernise the Indian financial system to assist growth of the real economy. The main focus of FSLRC was on governance reform and consumer well-being with clarity about objectives, powers and accountability of all financial agencies.He appears to disagree on judicial review of regulatory decisions. There are two inalienable features of a constitutional parliamentary democracy that emphasise the rule of law. First, the Constitution establishes the rule of law and Parliament is the proponent of such law.Second, all players in society are empowered, and constrained, by the Constitution and law. Subordinate legislation such as rules and regulations —including those made by regulators — must, therefore, be circumscribed by the parameters established by the Constitution and by law. "Be howsoever high, the law is above you" is its signature tune.Judicial review is essential to this framework. Not because it allows courts to second-guess decisions of those implementing the law but because it ensures that those implementing the law adhere to the Constitution and the laws made by Parliament.Else, the rule of law is reduced to mere ipse dixit of the executive. Rajan is correct in stating that courts already have the power of judicial review. He, however, believes that adding a specialised tribunal to exercise judicial review will reduce flexibility. This is flawed. A specialised tribunal works more efficiently and develops greater domain knowledge when compared with courts, which are already overburdened.Over the years, orders passed by stock markets regulator Sebi have showed a marked improvement once the Securities Appellate Tribunal (SAT) started reviewing these orders. SAT induced great improvements in the working of Sebi. RBI would similarly benefit from judicial review. The tribunal’s power to review rules made by regulators under the FSLRC report includes limited powers of judicial review on procedural and substantive grounds. Such a review will ensure that all regulatory actions emanate from the law that empowers the regulator and there is no ex cathedra regulation that the watchdog is unable to justify on merits.We reject Rajan’s claim that the regulator must continue to have discretionary powers and should not be answerable. Constitutional liberties of citizens and market participants are at stake when regulators and other agencies claim the need to be "flexible" in areas of legal vacuum. All discretionary powers, at whatever level exercised, must stand the test of scrutiny. To claim immunity from judicial review on the grounds of "flexibility" runs against the fabric of the rule of law.Even Rajan in his 2009 report, A Hundred Small Steps, says, "Regulatory actions should be subject to appeal to the financial sector appellate tribunal." In the absence of an independent and expert judicial review, the RBI’s performance will remain discretionary or arbitrary, and this does not serve any public purpose. Countries that achieved high institutional quality have done so by using an effective judicial system to keep the executive and legislature under check.With regard to the regulatory architecture, Rajan’s report of 2009 emphasises the need to reduce the number of regulators and for defining the jurisdiction of regulators in functional terms. He says, "Without reforms, however, the financial sector could become an increasing source of risk , as the mismatches between the capacity and needs of the real economy and the capabilities of the financial sector widen. Not only would the lost opportunities be large but the consequences for the economy could be devastating." Now, he has repudiated a lifetime of advocacy of reform, with the status quo claim, "If it ain’t broke, don’t fix it."Two expert committees of the consumer affairs department, Habibullah and Padhi, followed by expert committees led by Mistry and Rajan, followed by the FSLRC, said that Sebi should regulate commodity futures. Now, Rajan suggests futures would be better off with consumer affairs.It’s been tried and it failed. Should we prepare for the future or remain complacent with the present? FSLRC’s view was that peacetime is better to prepare for the future than wartime to fix things. Only legislation can drive institutional change to yield high performance institutions.The Indian financial code drafted by FSLRC appears to be the answer. The governor has said, "If it ain’t broke, don’t fix it." Another wise saying is that one must lead, follow or let others show the way, without accusing others of "schizophrenia".The writer chaired the FSLRC. Co-authored with D Swarup, former secretary in the finance ministry, and member-convener of the FSLRC