I was told that I needed to pay the premium for only three years and would get guaranteed tax-free returns. When I checked recently after paying three premiums, forget returns, the amount due to me was less than even the premium amount that I had paid so far.” Such complaints are common. Mis-selling can be (and is) prevalent in almost all financial products (loans, credit cards, risk-based insurance such as health insurance as well as investment products). However, the highest numbers of complaints are from selling investment products particularly investment-oriented life insurance products.
We have seen vitriol being poured over marketing practices in banks with various suggestions on how to curb this mis-selling. Here is my contribution to the raging debate on how to curb mis-selling.
Align distribution-investor interests: There is a need to align the interests of the distributor with the investor. Hence like in mutual funds, annual distributor commissions should be linked to annual investor fund values rather than to the premiums paid. This needs to be coupled with much higher commissions on the actual insurance charges within the premium. This will ensure that the agent gets a much higher remuneration when the investor sticks with the plan for the duration of the contract (which he should if the right plan has been sold to him) and takes adequate protection, which is the basic function of a life insurance product. This back-ended performance-based remuneration structure will ensure that only serious distributors with a long-term outlook on the business continue and the others drop out (anyway enforcing regulations for 3 million individual agents is a regulatory nightmare). This will also force institutional distributors to have a long-term distribution structure rather than remaining focused on the “fee income” for the current quarter that is so prized by the stock markets.
Change remuneration rules: With the proposed changes in the Direct Taxes Code that promises tax benefit on insurance policy proceeds only if the policy is held till maturity and has life protection of at least 20 times the annual premium, a lot of the current complaints on mis-selling should get reduced. Hopefully it will also start off a trend of distributors actually looking at investor protection needs and advising them to take adequate insurance.
However, the issue of the high cost of customer acquisition for the insurance distributor is not addressed in this structure, which will result in a loss for him in the initial years. Deducting a nominal fixed fee (not large enough to fuel mis-selling) from the first premium and paying it to the distributor can take care of this. Of course, if the investor goes directly to the insurance company, no such fee is payable. This remuneration structure runs the risk of incentivising overselling of protection policies but if that starts to happen, the structure can be amended to make it less attractive at that point of time. Certainly all this will require changes in the insurance Acts (which only recognizes commissions based on premiums paid as the basis for remuneration to insurance distributors) to provide flexibility to the regulator on remuneration structures. This will allow significant back-ended remuneration structures as well as linkages to fund performance rather than premiums paid.
Categorise products: Products need to be categorised as simple and complex. Complex products such as highest-NAV (net asset value) guaranteed unit-linked insurance plans should have high minimum amounts to keep out the lay investor. It is not that the one who invests higher amounts is necessarily more financially savvy but at least he may have access to advisors where he can get unbiased advice. Even distributors who are allowed to sell these products need additional qualification besides achieving certain minimum business levels to be allowed to sell such products.
Simplify terms and conditions: All products should have an “abstract” in simple language that provides information in bold letters on lock-in periods, surrender charges, other charges, fees and commissions payable to the distributor and a statement clearly stating that the returns are not guaranteed. Illustrations should have bold headlines in simple language that should clearly state that the returns are not guaranteed.
Dissolve or re-haul products prone to mis-selling: Products that beg to be mis-sold like traditional insurance products should either be comprehensively re-hauled to make them more investor friendly and transparent or should be discontinued. I think no unbiased advisor can recommend a traditional insurance product (as they are currently structured) for a client over other alternatives that are safer and more liquid and provide similar benefits.
Document consumer needs: Suitability guidelines have been spoken about in many forums. A compulsory series of steps that require documenting consumer needs and how the recommended product meets consumer needs creates a paper trail that can be tracked later. This is important in case of distributors such as banks with whom the consumer has an implicit relationship of trust. It is relatively easier to reduce mis-selling from this channel, which accounts for a major chunk of business done by private life insurance companies (around 35%).
Levy heavy fines: Any repetitive flagrant violations should be punishable with heavy fines (we need to see fines in crores rather than in lakhs). Such fines would have a surprising impact on mis-selling. However, Indian regulators are loath to levy heavy fines. But similar effect can be achieved if other permission such as to open new branches or chief executive compensation are formally made subject to a satisfactory review of performance on suitability parameters.
What you can do? Consumers, too, can contribute towards curbing mis-selling—they should be ready to pay for the advice sought. After all, when you want to learn and go to a teacher, you pay him a fee. If he asks you to buy certain books or implements, you go to a shop and pay for it separately.
Would you really go to a teacher who says he will not charge any fees for teaching, but you will need to buy books and implements recommended by him only from a specific shop? You can be sure that such a teacher will recommend the more expensive books/implements or recommend them even where none are needed. If that is so clear, how come all investors cannot get over their aversion to paying fees when it comes to financial products.
Above all, the industry mindset needs to change and it should genuinely work towards protecting customer’s interest who trust them for their financial well-being.
Harsh Roongta is CEO, Apnapaisa.com.
We welcome your comments at firstname.lastname@example.org