Sebi tightens, IRDAI loosens: the strange story of India’s retail market2 min read . Updated: 19 Mar 2016, 01:31 AM IST
Investment-linked life insurance plans and mutual funds compete for the same investor funds. How then can the government allow such different governance and consumer protection standards?
New Delhi: The capital market regulator’s Friday move tightening disclosure norms took the market by surprise. The circular dated 18 March 2016 (you can see it here) says that investors will now know what it costs them in terms of commission paid to the agents who sell them the funds. Remember, mutual funds (MFs) are zero-load—which means that your ₹ 1,000 goes to work fully—and has an overall charge that averages 2% a year. Commissions to agents are paid from this annual charge.
The Securities and Exchange Board of India (Sebi) wants investors to know what the agent selling them gets directly as commission and indirectly through gifts, trips and other “marketing charges". Large corporate agencies, banks and some large distributors have been charging much above the industry standard of 1% upfront commission (that comes from within the overall charges) by arm-twisting the asset management companies (AMCs) to compensate them via “gifts", “trips" and “other benefits". Now, all such compensation will appear on the consolidated account statement that each investor gets twice a year.
To increase disclosure, Sebi is now getting you to see the face of your fund manager and her income. Disclosures will include the name of the fund manager and details of how long she has been managing the scheme. You will also now know the name, designation and remuneration of chief executive officer (CEO), chief investment officer (CIO) and chief operations officer (COO). You will know the names, designation and remuneration received by all MF employees who earn ₹ 60 lakh and above. You will also get to know the ratio of CEO’s remuneration to median remuneration of MF/AMC employees.
More disclosure is good and while the debate on whether it is fair to disclose individual income will begin, the issue here is not what Sebi is doing, but what the other regulator in the system is doing. While Sebi is going down the path of even tighter regulations and more disclosure, the other regulator in the retail financial product space Insurance Regulatory and Development Authority of India (IRDAI)—is going in the other direction. A January 2016 draft has hiked commissions payable to insurance agents and intermediaries with a peak rate of 70% of the first year commission! (Read my column on this here)
Not just hiking commissions, IRDAI has lowered standards over the past few years. On 11 February 2014, it did away with a minimum persistency metric of 50% for renewal of agency licence. It was to rise to 75% in the current fiscal year (Read here). Each company can now fix its own persistency metric! No wonder that the 13th month persistency for some companies is as low as 50%. Persistency measures the life of a policy. A 15-year product does not last more than five years in the hands of the policyholder for more than half the industry. (Read my column on this here).
Investment-linked life insurance plans and MFs compete for the same investor funds. How then can the government allow such different governance and consumer protection standards? This is clearly a case that the joint regulatory form, the Financial Stability and Development Council, needs to solve.
Till then, shout out to investors, your MF just got even more transparent. Stay away from investment bearing life insurance plans. They are traps.