The contradiction is telling. India’s youngest regulator in the financial services space, Insurance Regulatory and Development Authority (IRDA), born on April 19, 2000, in the age of transparency has been and continues to encourage opacity. It seems more concerned about the business and profits of insurance companies than in protecting consumers. Its actions seem more embedded in the second part of its mission statement (“promote and ensure orderly growth of the insurance industry”) than in the first: “To protect the interests of the policyholders.” Titled “ULIP Products”, its August 18, 2007, rambling press release reflects this irony. The first para notes, “IRDA is keen to ensure that unit linked products are transparent and that customers (SIC) from every walk of life can compare features and charges across products and across companies.” Great — the regulator has finally woken up to the loot that has been happening in the garb of insurance over the past two to three years, and which we have been regularly highlighting. (For those who came in late, you need to be an accountant, lawyer and a finance whiz in order to decode the fees, expenses, costs, charges (FECC) and all other old fangled jargon that the industry uses to grab as much as 60 per cent of a household’s first year premium. While this would seem not only prohibitive but absolutely unacceptable to us who pay, particularly when agents encourage a policy churn after the first three high-cost years are over, IRDA seems to have no objections.) The next para states that “there is nothing wrong with the actuarial funded products (AFP) and they are not detrimental to the interests of policyholders”. Why tell us this? The answer lies in the third para that goes on to say that companies “having AFPs have been asked to withdraw them over a period of time. They can continue to sell the products till then.” If there’s nothing wrong with a product, why ask companies to withdraw it and kill innovation? If there’s something wrong with it (there is — to know what read today’s Express Money), why allow them to continue to sell even one more policy? So far, the regulator can be accused of being financially illiterate, spineless, consumer-insensitive and encouraging opacity. This letter shows there could be worse charges. Here’s what IRDA needs to do. One, end the sale of AFPs. Now — not “over a period of time”. Two, investigate similar structures in all other investment products pretending to be insurance and throw them out. Three, get companies to tell us, in writing, the exact cost of the policy they’re selling — one, repeat just one, number that encapsulates all FECC and that can be compared, as IRDA says, “across products and across companies”. In other words, look at and serve the first part of its grand mission statement. Learn from Sebi In contrast, the August 22, 2007, proposal of the Securities and Exchange Board of India (Sebi) is clear, unambiguous and investor friendly: “Sebi is now considering giving a waiver in entry load for direct applications received by the AMCs (asset management companies), ie applications received through Internet, submitted to AMCs or collection centres/ investor service centres that are not routed through any distributor/ agent/ broker.” Translated into English, it means if a household wants to invest in an existing equity mutual fund (MF), it need not pay the 2.25 per cent charge or load that goes to the distributor. Investors who know enough about funds to be able to track performance — it’s easy since, unlike in insurance products, there is only one number to track (growth of net asset value) — can now invest directly, without paying the load. Quite like their high net worth brethren or institutions who don’t pay load (generally for applications above Rs 5 crore). They need not pay the 6 per cent for a new fund offer either. In the tanned leather armchairs of distributor board rooms, wails have begun. Predictably, they are afraid that they will lose business. Sure they will, but only those who have been behaving like courier boys. Distributors and agents who have graduated into becoming financial planners have nothing to fear — their advice, if good, will help them keep their clients, customers and of course, commissions. In fact, this is a good opportunity for the distributor community — banks, companies and individuals — to aspire for and transform into an industry of financial planners, where apart from commission they can charge for advice. Of course, for that to happen, they must be regulated and steps are on towards the creation of a self-regulatory organisation. They must also realise that perhaps they’re only objecting to change as a concept — nobody likes to step out of a well-functioning, profitable paradigm. I don’t think this move will make distributors redundant; the loss in customers, if any, will be to the tune of 3-5 per cent. For investors, of course, it’s a win-win. Maybe IRDA should give Sebi a call.
