While we were used to the mutual fund industry complaining about its regulator, soft voices against the regulator are surfacing in the life insurance industry as well—and they sound very surprised. The funds were used to a tough regulator, but the insurance industry is a bit open-mouthed by the sudden turnaround in a “friendly” regulator to one that not only goes ahead with tough regulation, but follows that up by taking out television and newspaper advertisements asking policyholders to complain against insurance companies. The playing field, as far as complaining about the regulator is concerned, is fast getting levelled.
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The story of the mutual funds’ serious discontent with their regulator began a year ago. On 1 August 2009, India became the only country in the world to go no-load on mutual funds. Over the past 12 months, equity investors have pulled out at least Rs70,000 crore. But they had redeemed larger sums in 2006-07 and 2007-08 as well. What makes this number stand out is that, unlike previous years, there were not enough fresh inflows to fill the hole, let alone grow the pie, so that the net outflow from equity schemes is at least Rs7,000 crore. The lack of fresh inflows is linked to the agency channel not selling funds, but substituting unit-linked insurance plans (Ulips) that were still paying 18-40% in the first year as commission. The agent, of course, was making a rational economic decision to maximize his income. If the laws of the land allowed him to do this, why should he not? In reaction to the no-load rule, some mutual funds are changing their business models, some are thinking of selling out and yet others are seen in the corridors of power walking around with knives freshly sharpened by the net redemption number to get the cause of their misery removed.
The story of insurer discontent is just beginning as the regulator tries to discard the industry association label and flexes its regulatory muscles. Even as the insurance regulator won the Ulip battle and threw off the Securities and Exchange Board of India challenge, it made significant changes in the structure of the controversial Ulip product. When the draft guidelines came out in June that sorted out most of the issues with a Ulip product, the industry expected a long period of negotiation with the regulator and loads of dilution along the way. But, even as the industry huddled to discuss the required changes, the Insurance Regulatory and Development Authority went ahead and notified the draft regulations, giving the industry less than three months, till 1 September, to change the nature of the Ulip product. If this took the industry by surprise (pure shock is closer to what the reaction was), what followed is causing even more stress. The insurance regulator has an advertisement on air that shows a policyholder as a passenger being thrown off an aircraft by the villainous industry and being saved by the insurance regulator. The industry is shown quaking and grovelling at the feet of the consumer. This comes along with an ad splash that is difficult to miss that asks dissatisfied policyholders to complain on a toll-free number.
The marketplace, too, has got less lopsided. Or will do so once the new Ulip product guidelines kick in from 1 September. While there is still an arbitrage in selling Ulips since the costs at the end of the first five years are capped at 4% (the comparative number for funds is 2.5%), the products have a lock-in of five years, while funds don’t. The fund industry is able to showcase its 10-year-old performance history with returns of at least 15% year-on-year. Ulips as a market-linked investment product can’t boast the history or the returns track record as funds can. So, it would actually be fairer to wait another year and look at numbers again—September to September—to see how investors behave once the playing field is more level than before. Unfortunately, for everybody—investors, companies and distributors—the debate has become a standoff between mutual funds and Ulips. Strangely, everybody is fighting for the same pie, while the real market size is much bigger—the micro-finance companies have shown how big and profitable a business can be, only if you think out of the box. But battles that are fought with Rs3 crore chief executive officer salaries and Rs10 crore top management billing will first try and work the system, fix the regulator, regulations and rules, instead of developing the market. The sad part of the story is that the turmoil keeps investors out, and we are losing one of the best periods of equity growth for retail investors. Pensioners in the US and Europe are getting the benefit of India growing at 9%. But not Indian investors.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money.