What would you call a regulation that is titled Protection of Policyholders’ Interests, but is anti-consumer in its direction and intent? The draft regulation by the same name released by the insurance regulator on 1 February 2017 (you can read it here: bit.ly/2l9NpgI) has removed some basic consumer-first provisions that an earlier 2014 draft had suggested. As investors and consumers of financial products, we should worry about this.
Over the past few years the Insurance Regulatory and Development Authority of India (Irdai) has made several moves that are glaringly anti-consumer: hiking agent commissions, legalising what were earlier illegal payments to agents (bit.ly/2nr4hja) and allowing insurers to sell policies that lapse, and making consumers lose their invested amounts (bit.ly/2omsXH0), stand out amongst many other actions of an anti-consumer regulator. This is in direct contrast to increasing worries by global regulators about the difficulty of consumer protection in retail finance and higher levels of accountability and hygiene in finance.
What’s wrong with the latest draft from Irdai? Good regulations flow from an articulated set of principles. Core among these are some basic consumer rights that are getting hard wired into regulations globally and in India. For instance, the draft Indian Financial Code lists six protections for consumers of financial services. Financial firms must act with professional diligence, consumers must have protection against unfair contract terms and against unfair conduct that can be misleading and abusive. There is a requirement of fair disclosure. Personal information must be protected and complaints must be redressed by the financial firm.
Retail consumers have three additional protections: they have a right to receive suitable advice, have protection from conflict of interest of advisers and have access to a combined redressal agency, the Financial Redress Agency (FRA), for redress.
The Reserve Bank of India (RBI) put out a Charter of Consumer Rights (bit.ly/2n8T0QN), which lists five basic rights, including the right to suitable advice, privacy and fair and honest dealing. The capital market regulator has gone a step ahead and made mis-selling a mutual fund punishable under its stringent Prohibition of Fraudulent and Unfair Trade Practices regulation.
In 2014 Irdai put out a draft to update its 2002 regulation that dealt with consumer protection. For 3 years the draft did not become final regulation and now, in 2017, Irdai has put out a new draft that takes away basic protections and rights that the 2014 draft promised.
What has Irdai done? The regulator has removed the seven policyholder rights that were there in the 2014 draft from its 2017 version. The rights that we have lost in this regulation include: the right to professional diligence, the right to protection against unfair contract terms, the right against unfair market conduct, the right over our personal information, the right to a fair disclosure, the right to get suitable advice, and protection against conflict of interest of advisers. It has removed the provision that asked insurers to ensure that the benefits of the policy are not misstated or misrepresented. The 2014 draft made it the duty of the insurer, the agent and the intermediary to ensure product suitability according to income, personal circumstance, life stage, financial goals and risk appetite. If the 2014 draft became law and was enforced, we would not have life insurance being sold to old people, or people who want a fixed deposit and are sold a recurring-premium, long-term policy.
To take away the right to a fair contract is perhaps the rudest cut. Financial sector contracts are one-way contracts. Have you tried changing a clause in an insurance policy or a home loan application? Because mass retail contracts cannot be written individually for each client, the duty of care rests on the firms to design contracts that are not unfair. Since financial firms are not known for their ethics, the job rests with regulators worldwide to ensure that consumers have a right to fair contracts. Irdai has gone ahead and removed from this document the right to a fair contract.
While this column and other writers, planners and government committees have flagged the decline of consumer rights in insurance, various finance ministers have turned a blind eye to all evidence that points to deep rot in the sector. One of the previous finance ministers, as told to me by a Reserve Bank of India deputy governor, had said: “Insurance is off the table.”
The smart people have already shunned life insurance as a dud investment, they use it as a pure life cover product. This means that bundled life insurance is being sold to the most vulnerable parts of the country—those who don’t know any better and are not literate enough to even ask questions. Finance minister Arun Jaitley must take notice of the murder of consumer rights in insurance and take action.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, and on the board of FPSB India.
She can be reached at email@example.com