With a growing number of financial schemes readily available for investments, at times you might feel spoilt for choice. However, worries over mis-selling are also on the rise.
Recognising these concerns, a government-appointed panel has recently submitted a report with suggestions to improve investor protection and curb mis-selling of financial products. Stressing that its recommendations are aimed at ensuring that “customers are treated fairly”, an expert panel led by former finance secretary Sumit Bose has mooted a range of options to curb mis-selling such as full disclosure of risks in an easy to understand language, reasonable costs for surrender of products as well as flexible exit options.
“The committee members have a lot of experience and the recommendations are fairly comprehensive. The timing and method of implementation has to be decided by the regulators,” said Bose.
The government, too, has swung into action on the recommendations. If implemented, these could bring in a huge change in the information flow and the understanding of retail investors of these products and their choice in purchasing such products.
While the finance ministry has sought public comments on the report by October 5, industry bodies such as the Association of Mutual Fund Industry (AMFI) has also begun actively discussing the report.
In a special board meeting called on Wednesday, AMFI asked all 44 fund houses to give their feedbacks on the report. “Even as a final view on the implementation part of the Sumit Bose panel report is to be looked at by the regulators, we have asked our 44 members to give their views,” AMFI chief HN Sinor had said.
Meanwhile, pension regulator the Pension Fund Regulatory and Development Authority (PFRDA), too, has sought comments on the report. The report is significant given the huge size of the personal finance market and the huge potential in a country like India where a large majority of savings remain in the informal sector.
At the moment, there is a vast array of financial products in the country, each being termed as the best investment product for the subscriber, offering high returns and low risks. While mutual funds offer portfolio mixes of equities and debt through various schemes, life insurers offer products under four broad categories of traditional endowment plans, unit-linked insurance plans, term plans and annuities, apart from index-linked insurance products. Meanwhile, pension plans through the National Pension System are also available.
Official data reveals that at present over Rs 13.51 lakh crore of retail savings are invested in mutual fund schemes, life insurance products and the National Pension System (NPS). Data with the Insurance Regulatory and Development Authority of India (IRDAI) reveals that the assets under management with the 24 life insurers was Rs 23,568.14 crore with a total of 46.44 lakh policies as on June 2015. The total corpus with the NPS was Rs 95,829.60 crore and 92.89 lakh crore subscribers in its five main schemes as on August 31, 2015 while the AUM of the 44 mutual fund houses was Rs 12.55 lakh crore during the period.
Each of these are monitored by different regulators — Securities and Exchange Board of India (Sebi) regulates mutual funds, IRDAI regulates insurance companies while the Pension Fund Regulatory and Development Authority (PFRDA) regulates the NPS.
One of the key recommendations of the report is aimed at addressing the regulatory overlap and sometimes even the gap in monitoring of financial products. Accordingly, it has suggested that regulation of financial products must be seen in terms of product function — insurance, investment or annuity and the lead regulator should set the guidelines. “There has to be a lead regulator for such products and it is up to the regulators to work out between themselves how this should be done,” explained Bose.
This has been a slightly murky affair and in the past products such as pension plans and ULIPs have been a subject of a turf war between Sebi and IRDAI. Way back in 2010, the government had to issue an ordinance to clarify that the insurance regulator would be responsible for regulating ULIPs. More recently, the PFRDA had also begun compiling details of superannuation funds run by private firms to sift through the gray areas of regulation and bring those not governed by any statute under its ambit. Another significant noting by the committee has been its critique of agents and brokers and it has also pointed out that banks often have a tendency to concentrate on in-house sales by asset management companies (AMCs).
“Financial products are sold by an army of distributors. These distributors are either agents, which include individuals or corporations such as banks, and brokers,” said the report, pointing out that while agents are remunerated by the product provider, brokers represent customers and have fiduciary responsibilities towards them.
“Anecdotes suggest that the customer is likely to believe what the distributor, most often the agent, says while not fully realising that the agent is actually serving the interest of the company,” it noted.
Pointing out that mis-selling can be of various types, such as a salesperson not disclosing the full features of the product or passing on rebates to customers to lure them to buy the product, the report said: “An example is where a salesperson suggests the purchase of one product without showing the array of products that a customer could potentially purchase. This is especially pertinent in the case of banks in India who are seen to have a high concentration of in-house sales to their AMCs.” The report added that regulators must put additional disclosure requirements on banks.
Meanwhile, officials point out that the next step in consumer protection could be if and when the recommendations of the Financial Services Legislative Reforms Commission are implemented. Calling for a complete overhaul of the financial sector regulatory architecture, it had suggested setting up a single unified Financial Redress Agency (FRA) which would serve any aggrieved consumer, across all sectors.
“This would feature a low-cost process through which the complaint of the consumer against the financial firm would be heard, and remedies awarded,” it had stressed in its report submitted in 2013.