Mumbai: Finance minister Pranab Mukherjee’s Monday statement that “India could set a global...no-load fee model for entire financial sector to ensure fair deal to all market participants” could radically change the Rs15,000 crore financial product distribution industry that has been growing with the advent of private sector life insurance and asset management companies.
Hoping that “all financial sector regulators would work towards this goal”, Mukherjee lauded the capital market watchdog Securities and Exchange Board of India, or Sebi, decision to make mutual fund advisers an agent of customers rather than of the company whose products they sell. According to him, this would go a long way in protecting small investors.
Mukherjee’s statement marks a public endorsement of recommendations made in November by a committee chaired by D. Swarup, head of the Pension Fund Regulatory and Development Authority, or PFRDA. The committee had recommended a no-entry load regime for all financial products.
Consumer interest: Mukherjee lauded Sebi’s move to make advisers the agents of customers rather than of the company whose products they sell. Raj K. Raj / HT
Currently, mutual funds and pension funds are no-load products. Sebi removed loads from mutual funds in August, while pension products are commission-free since their inception. But insurance products continue to charge hefty commissions. The Swarup committee had said that the upfront commissions embedded in insurance premiums paid should be capped at 15% immediately from 16.25%.
According to the committee, by April this year, this should be brought down to 7%, and by April 2011, a zero-commission structure should be in place.
But the insurance regulator—Insurance Regulatory Development Authority, or Irda— has desisted from making any strong move. As a result of this, all distributors are now aggressively selling unit-linked insurance plans, or Ulips, where they earn high commissions. Ulips are a combination of insurance and investments.
“I have submitted the report to the government in November. But the ministry has been holding it back due to a dissent note by Irda in the report. Irda is opposing no loads saying if there are no commissions, the industry will die,” Swarup, who retired as chairman of PFRDA in December, told Mint on Tuesday.
According to him, Irda’s mandate is not to protect the industry, but the policyholders. “We have put a note against this, saying Irda is thinking about the industry. It is set up to protect the interest of the consumers (policyholders) and it should be acting in their interest. The panel’s recommendations are in the interest of the consumer.”
Saurabh Mukherjea, head of Indian equities, Execution Noble, a UK-based investment bank, said: “The long-term drift of this issue will make Ulips more customer friendly product. A strong pro-consumer lobby is working towards making this an inexpensive product with support from key governmental stakeholders.”
In the short term, according to him, another strong lobby is working to keep the status quo as life insurers, who are planning public floats, want to keep Ulips, their most attractive offering, in their current form.
Listed brokerages such as India Infoline Ltd, Indiabulls Financial Services Ltd, Motilal Oswal Financial Services Ltd, Religare Enterprises Ltd, Geojit BNP Paribas Financial Services Ltd and a few others earn anywhere between 5% and 15% of their revenue from the sale of financial products. Most of these firms were able to shrug off the Sebi move to ban entry loads in mutual funds as commissions from selling Ulips form a significant portion of this income.
“Brokerages saw distribution of insurance as an additional stream of income without additional cost. They could augment revenue just by adding one person or with the same staff as these products can be cross-sold to equity investors,” said an Execution Noble analyst.
India Infoline has the largest distribution business among all listed brokers. Analysts say roughly 12-15% of its revenues last year came from sale of insurance policies.
According to Irda rules, an agent is not allowed to sell policies of multiple insurers. However, an insurance broker is permitted to sell policies of multiple distributors.
India Infoline, which started as an agent of ICICI Prudential Life Insurance Co. Ltd, has got approval to operate as a broker, allowing it to sell products of different insurers.
Brokers are already seeing the writing on the wall. K. Venkitesh, national head-distribution, Geojit BNP Paribas, said the industry should move towards a fee model, and start charging the customer separately instead of deducting commission from the premium paid. “Any move to shift to a no-load regime has to be weighed carefully and done in a phased manner. Even in the UK, where the market is more mature, the changes are being implemented over a period of three years. Our market is still growing, any abrupt change will hurt the industry.”