Home / Opinion / Online-views /  Irda opens the door to getting banks to focus on mis-selling

The increasing confidence of the Insurance Regulatory and Development Authority (Irda) showed two weeks ago when it slapped a fine of 1.47 crore on HDFC Standard Life for some five violations out of a list of 25 charges. Indian regulators are not known to levy large sums as fines. Probably the highest fine levied by the regulator till now, the move showcased Irda’s ability to go beyond the defunct 5 lakh limit that the Insurance Act insists on. Fines and penalties are governed by the Insurance Act of 1938 that caps fines at 5 lakh. Must’ve been a large amount 70 years ago, but now it does not even buy the paper that an insurance company will write its policies on. Inflation indexed at 6% a year, that limit should’ve been at 3.7 crore today and this would have translated into a 109 crore fine for HDFC Standard Life or almost 40% of its 2011-12 profits. Right now the fine bites less than half a percent of profits. The world has moved on from 1938 and now the limit should be reworked to a floor and not a ceiling. The stalled Insurance Bill has been frustrating not just for companies that wanted the foreign direct investment (FDI), but also for the regulator, which wants more teeth. Irda has been innovating on the fly to bite down harder on the companies. It is splitting the fine across years, across aggrieved policy holders, across any category it can find to impose the maximum fine of 5 lakh in a more meaningful manner. HDFC Standard Life, for example, has been fined 1.05 crore for ignoring an Irda notice to waive the 90-day waiting period in home loan-linked life insurance policies in 2003. There were 21 policy holders whose claims were rejected and apportioning 5 lakh each to them, Irda has instructed the insurance company to not only pay the claim but also pay a fine.

By Shyamal Banerjee/Mint

This is probably the second time that Irda has fined a bank. In February 2011, Central Bank of India was fined 5 lakh for violating the “one bank one insurer" rule of Irda. The bank, while being the corporate agent for New India Assurance, got into an agreement with Cholamandalam General Insurance. Irda is clearly stepping over the invisible threshold that exists between regulators. Regulatory turf is respected in the financial sector and other than the public Securities and Exchange Board of India-Irda spat over who will regulate unit-linked insurance plans, there are few examples of such open hostility. One reason for that has been the grand old man status of the Reserve Bank of India (RBI) that prevents younger and less powerful regulators from leaning on banks for violations linked to products that they regulate. The insurance regulator, it seems, has decided to bite the bullet. If the IndusInd case is a precursor, we should see the corporate agents named in the HDFC Standard Life case get penalized too.

But here is where the story gets interesting. Long-time RBI watchers say that banks will get help soon. Some quiet arm-twisting will happen and the Irda threat could melt away. It would be another lost opportunity if that were to happen. RBI should use the door that Irda has opened to push through more accountability at banks. Banks have emerged as large sellers of retail financial products such as mutual funds and insurance products, both life and general. There are anecdotal examples—unending stories from bank customers who’ve been ripped off by their banks in selling an unsuitable insurance product or churning the mutual fund portfolio. The mutual fund and insurance company CEOs talk about it. The regulatory staff in both Irda and Sebi discuss it—that mis-selling by the banking channel is rampant and falls between the regulatory cracks. RBI has had a hands-off policy on the sale of retail financial products: the problem is that of the manufacturer—the insurance company and the mutual fund. And that is the position of the banks when customers complain. Two responses are given to complaining customers. One, talk to the insurance company. Two, the person who sold it has gone, we’re not responsible. There are basic flaws in both the arguments, and here’s hoping that RBI will see it as a consumer issue and not a turf issue and work to plug the regulatory gaps.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

Also Read | Monika Halan’s earlier articles

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