Policymakers have long bemoaned the “non-optimal" Indian household that holds “unproductive" gold and land rather than financial assets. The same policymakers have sat on defined-benefit pension plans, medical treatment for life, other perks and have had very little idea about markets, how they work and how ordinary people deal with on-ground issues. They also forget to look at supply-side market failure before blaming the household. That household whose rupee finally makes the whole story hold together through taxes, consumption and savings. But very little work goes into working through why a household behaves the way it does when it makes its investing choices and even when there is work, it is ignored and not implemented.
Serious work on looking at the household side of the story began a decade ago in the aftermath of the bitter Sebi-Irdai spat that saw Sebi fighting to get the Ulip under its regulatory control since it was a mutual fund with 90% of the premium going towards investment and just 10% towards insurance. The spat, the rampant gouging of money from very small savers by the Ulip product in 2007-2008 and a big uproar in the form of letters to the FM protesting this loot finally reached the ears of the mandarins of North Block. In particular, one tear-filled letter written in Bangla to the then FM by a school teacher near Kolkata was the tipping point that triggered the first government committee to look into the issue of mis-selling, incentives and household savings from the demand side. The Swarup Committee was set up in 2009 to suggest a road map to address these issues. Needless to say, other than Sebi, the other regulators simply ignored the recommendations of the committee. A second push to put the household at the centre of the financial system and collapse all regulators into two—RBI and a unified regulator that handles all non-banking products and services—was recommended in the Indian Financial Code in 2013. This would remove the regulatory arbitrage, firms shopping for lax regulators and bring better order in the supply side of the market. Needless to say the report is not on the to-do list of the government. A third committee was then set up in 2015 called the Bose committee to address similar issues of investor protection. Again, other than Sebi, other regulators just ignored the recommendations. A fourth push came in 2016 to make a common redress agency called the Financial Redress Agency to look after all investor complaints. The regulators were outraged at this turf erosion. A fifth committee on household finance was set up by RBI in 2017 called the Ramadorai Committee and been ignored by the regulator who constituted the committee.
The conclusions of the deep dive into the state of the markets were broadly similar. One, it mandated a rethink in regulation by function and not form. This means that investors should not have to shop for a tighter regulator, while product manufacturers and intermediaries hunt for the lax regulator. Two, products that are similar in their function should have similar rules. This would mean that all insurance products will follow rules set by Irdai and all market-linked investment products will follow rules set by Sebi, all deposit-like fixed-return products that declare an interest will be regulated by RBI and so on. This would then mean that the deposit schemes offered by real estate and gold firms would come under the RBI ambit and the market-linked insurance plans would come under the ambit of Sebi. Needless to say, there is stiff resistance by the regulators on this. Three, incentives on similar products should be similar. This means that similar products should not have hugely different incentive structures. Why should it take a 35% first-year commission to sell a bank deposit with a crust of an insurance cover when a bank deposit does not have that cost, is not a question the regulators want to answer. Needless to say, there is stiff resistance by the regulators on this recommendation. Four, the punitive powers of regulators must be increased and they must not be shy to use them. Regulators have treated each case of fraud, mis-selling, cheating as an isolated case and have usually not dug deeper to find out if that story is repeated across many instances and if they can do something to help those who have not complained. Product recall and investor compensation, for instance, is not something Indian regulators want to do. The UK financial market regulator has got investors cheated in a payment protection insurance (PPI) almost £9 billion in 2010-12 as compensation and refund. Needless to say, Indian regulators....
The stories of fraud, cheating, tricks, traps and mis-selling will continue unless the Indian regulators work together with a common goal in mind—that the investor interest comes first. Since the regulators are obviously not going to be able to sort this out themselves, it will take the ministry of finance to play the headmaster. Or, to be gender neutral, headperson.
Disclaimer: I have either been a part of or have been associated in some way with most of the above mentioned committees.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation