The government has made the Insurance Regulatory and Development Authority (Irda) the sole regulator of unit-linked insurance plans (Ulip) and amended the Acts governing other regulators to make its intentions clear. I have two views on this handing over of a hybrid product to one regulator instead of a joint-regulation mechanism with the Securities and Exchange Board of India (Sebi)—a precedent for which exists between the banking and capital market regulators. One leads to a process of harmonization of the market place in which investors (and the country) win. The second leads to a situation where the investor invests in financial products at his own risk because the government backs institutional cheating in a country where lobbyists with vested interests win. The consumer loses.
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View one. The issue is not about which regulator wins, but does the consumer win or lose. The consumer is indifferent to regulators, but does want a market place that he can understand, navigate and where there is no wilful deceit in product sales. From the consumer’s point of view, the key argument in the Irda-Sebi battle was not about turf but about mis-selling. When the battle began, Ulips were governed by rules that were archaic—the product was built like a trap to force investors into a lose-all or pay-more-to-get-something-back decision. The product structure was opaque, with multiple costs calculated in many ways and with no uniformity across products, making the investment-linked insurance plan a textbook case for mis-selling. Worse, the commissions were loaded on to the first year of a 15-20 year product, with no deterrent to the seller for adopting a hit-and-run sales strategy. Not surprisingly, most urban households have a hit-and-run story to share.
What the open regulatory battle and the accompanying public gaze has done is to bring about reform in insurance regulations. Though they do look a bit knee-jerk, they are along a path that will lead to a better marketplace, though they still need to travel some distance to come up to the standards of transparency and investor-focus established by Sebi in mutual fund regulations and product structure. However, there are issues that joint regulation would have solved that need attention now. Market-linked products (such as mutual funds and Ulips) need a basic level of hygiene around rules on benchmarking, a simple cost structure, easy entry and exit (unless it is a pension plan) and portability of investment. These need to be worked upon by the insurance regulator to prove that it is really investor-friendly and is not just reacting to the public outrage on this product and its manner of sale.
Assuming that the marketplace is levelled, there still remain concerns of mis-selling. Any product can be mis-sold, even a well-structured one. The last piece that needs to fit in now is to bring in sales-side regulation. Sebi has already taken a step in this direction and Irda is working on a format as well. The ministry of finance needs to ensure that these regulations are the same for the entire sales force in India. With these changes in place, the investor may begin to trust the market again. The issue between Sebi and Irda is less about who wins, but about using this opportunity, where attention is on this problem, to make rules that work for the consumer. If, along with single-point regulation of the Ulip product, the government also nudges change to take care of the above issues, then it is irrelevant who regulates the product. The investor really is not worried about how much territory who has, but how safe his money is and how confident he feels about moving from gold to a market-linked investment.
View two. If the ministry of finance has misread the depth of mis-selling in the insurance industry and has handed over the keys to further institutional cheating to a regulator who has done very little to show (before the battle with Sebi began) that it spends time worrying about the investor, there is trouble ahead for the marketplace. If insurance products continue in their current forms without addressing the issues of product structure, cost rationalization, traps built into the product and a lack of benchmarking, comparability and portability, there is only more chaos ahead.
Without a process of a level playing field from the point of view of the investor, and not in terms of net worth of companies, that allows transparency in product choice, India would have missed a great opportunity to harness the gains of retail money moving out of unproductive assets to get to work. We may remain the richest country in terms of assets, but they will be unproductive. A young couple I met recently had been hit by a Ulip. Guess what the lady is buying now? Gold.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is consulting editor with Mint.