Opinion | Toward cleaner, leaner financial products

While the Reserve Bank of India (RBI) was busy with its big battle with the government over turf in 2018, some of the other financial sector regulators were incrementally moving regulations to make financial products and services better for the household. Most of these changes increased transparency, reduced costs and made transactions a bit easier for the average financially-included household. The Securities and Exchange Board of India (Sebi) cleaned up the clutter in the ₹ 24 trillion mutual fund market by fixing and tightly defining fund categories along with well-defined benchmarks. Sebi also reduced costs for investors by lowering the ceiling on expense ratios that mutual funds can charge. The regulator had found the industry passing on the benefit of the growing asset size to institutional investors but not retail, and hence the chop-chop on overall costs. The Insurance Regulatory and Development Authority of India (IRDAI) chipped away at the product structure of life insurance policies, but did not go far enough. The big win for policyholders was in the health insurance space as the regulator defined exclusion, or the diseases that the policy does not cover, more tightly. Insurance firms were using the loose regulation to deny claims. India’s rate of policy rejection for privately held policies at 58% is very poor when compared to best practices. The National Pension System (NPS) got a boost with the government finally accepting the regulator’s demand to get the product tax-friendly by making the maturity corpus tax-free. The NPS allows vesting subscribers to commute 60% of the corpus while 40% goes toward a mandatory annuity. NPS also allowed subscribers to invest up to 75% in equity, up from a ceiling of 50%, till the age of 50, after which the equity allocation begins to taper off. The Employees’ Provident Fund Organization (EPFO) took big steps to digitize PF, making on-boarding, transfer and exit far simpler than before. After several missteps, the RBI finally moved to make floating rate loans really float by asking banks to choose and use an external benchmark. Banks were found “managing” their benchmarks against which the loans floated so that borrowers lost with higher costs of borrowing and lower deposit rates.

The regulators, however, missed the opportunity to work together and think of the household rather than their own turf or industries. IRDAI clearly did not act to take the monkey of high front loads and very high surrender costs in life insurance products off the consumer’s back. The year 2019 should see the insurance regulator move to reduce the claims rejections by insurance firms on flimsy grounds. IRDAI should take on board the recommendation of an expert committee that puts in place an eight-year window of continuous renewals after which claims will not be questioned on non-disclosure. Sebi needs to decide whether a distributor can advise or not—the issue impacts not just the consumer, but also a vibrant distribution channel that has taken the systematic investment plan to almost ₹ 8,000 crore a month. Both RBI and IRDAI need to put in place rules around the distinction between advisers and distributors—the lack of distinction is causing products to be mis-sold by agents who act as advisers.

The big change needed is the convergence of the financial sector regulators so that households need to shop products and not regulators. But that is a change that 2019 is unlikely to see.