It is only when the volume of traffic increases to a certain intensity that the need for a set of road rules is felt by all parts of the system—the users of the roads, the pedestrians, the vehicle manufacturers and the traffic police. Retail financial products are in the same space—the volume of products and consumers is such that most parts of the market (manufacturers, distributors, consumers and regulators) feel the need for some road rules. Those opposing benefit from the current lawlessness as they sit in parts of the market protected by archaic regulations that have no place in the contemporary Indian financial marketplace.
However, the lack of road safety has got to a point that weaslings from within the lawless group are now beginning to come forth with data, information and evidence that prove the institutional rip-off in the manufacture and sales of life insurance products. The saner part of the Indian financial products and services market wants rules in place on sellers and advisers of financial products in the retail part of the market.
Regulation to ensure a fair deal to consumers of financial products and services is still something regulators worldwide are struggling to get right, being, as they are, used to looking after the product manufacturers and banks. The US (Investment Advisers Act, 1940) has regulation that is written from the point of view of the product manufacturer and distributor, and recent amendments show the changing focus towards the retail customer. The UK has a more consumer-centric set of regulations (Financial Services and Markets Act, 2000) in place that look at principle-based regulation rather than rule-based ones.
Nearer home, some countries have already had a headstart in this direction with Singapore passing its Financial Advisors Act of 2002 and Hong Kong and Malaysia following in the next few years with similar Acts to put in place road rules for sellers and advisers of financial products.
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Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd, an integrated wealth management platform that operates in these markets and is now in India, says such regulation has worked to increase the hygiene of the market, apart from making investors more sure of what they are doing.
Singapore, following the UK model closely, has gone to stage 2 of regulation by including in the Act in April 2009 fair-dealing directions called Guidelines on Fair Dealing—Board and Senior Management Responsibilities for Delivering Fair Dealing Outcomes to Customers. The five “fair dealing” outcomes that Singapore wants for customers of financial products and services are of confidence in financial institutions, suitability of financial products, competency of advisers, unbiased information and an independent and efficient complaints redressal system.
While attempts to get adviser regulation in place have been on since the last three years, it is only now that India is actually close to getting a move on in this direction. The first few attempts were made under the aegis of the High Level Co-ordination Committee (HLCC) of the financial sector regulators, but the non-statutory nature of the committee prevented any consensus from emerging on how these should be rolled out.
With the Budget mandating the setting up of a Financial Stability and Development Council (FSDC), the financial adviser and seller regulation should be within striking distance. What HLCC could not do due to a lack of regulatory teeth, FSDC, with the finance minister as chairman, will be able to manage, despite parts of the market (some who pay hefty dividend cheques to the government) going kicking and screaming towards some road rules.
The challenge ahead will be to get a regulation system that is not so tough that it chokes off growth and innovation, nor one that leaves gaps that will make the law-abiding parts of the market look foolish.
What should you expect to change in the way you buy and sell financial products? It isn’t as if a magic wand will result in a zero-problem retail market, but we will see a move towards a more orderly marketplace. Consumers of financial products who are capable of making their own decisions will move to an Internet-based marketplace where they will transact on their own for a small charge.
For the bulk of the consumers of mutual funds, home loans and insurance products, who need guidance, there will be a system of need-based product selection that operates at various levels of service and cost. You will, of course, pay for distribution and advice, but the manner of payment will be more transparent with accountability built into the system.
At the minimum, verbal assurances or even written return projections will be replaced by a system where you, along with the person selling, sign off on what you have agreed to buy, at what cost and with what expectations in mind. The seller will have to record the reason why this decision was made. Even with just this in place, the existing road users will have the confidence to travel longer distances (read: invest for the long term) and those hesitating on the side will get the confidence to come into the market.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at email@example.com