Customers cant ask right questions without knowing how finance works

The winds of change are blowing in the financial service industry. Just weeks after Sebi abolished the entry load for mutual funds and IRDA....

The winds of change are blowing in the financial service industry. Just weeks after Sebi abolished the entry load for mutual funds and IRDA capped the charges in case of Ulips,a panel headed by D Swarup has recommended sweeping changes in this domain. The consultation paper on Minimum Common Standards for Financial Advisors and Financial Education seeks to abolish loads from all financial products and introduce a fee-based model. The paper is put on the PFRDA website for comments and feedback. The Indian Express spoke to Swarup on the need for such changes and whether their time has come.

Excerpts:

The earlier committee on financial advisors did not feel any need to change the sector as of now. So why was this committee formed?

Two years ago,the High Level Committee on Capital Markets HLCC had formed a committee to look into the financial sector space in the country. The committee was chaired by then IRDA chairman C S Rao. It had deliberated for some 18 months and submitted a report stating that everything seems to be fine for the time being and maybe this matter should be relooked at on a future date. HLCC,however,had doubts on the inclusions of the report and they probably thought it was time to look into the financial sector space more seriously. Therefore,they constituted another committee,the present one,almost five months ago.

Do you think these recommendations will sail through smoothly and be accepted by all regulators?

Unlike the earlier committee,we adopted a highly research-oriented approach that forms the basis of each recommendation. The research team was asked to do a global search on what other countries are doing. Besides,they conducted email surveys and took into account opinion of some 100 firms,distributors,agents,and entities that are major players in the financial sector. There were also 30 personal interviews conducted to gather information. The results of the research were then discussed with the committee which was constituted of representatives from all four regulators and the government.

What are the main recommendations?

This is just a consultation paper. Therefore,the tentative recommendations are: One,we need to have a structure for both investor protection and awareness. These are two sides of the same coin. Unless we empower the individual to know the basic concepts of finance,we cannot expect them to ask the right questions and ensure their financial well being. Secondly,we have proposed a common entry barrier and continuance education through refresher courses for all financial advisors. At present,there are no refresher courses or re-licensing for agents. As finance is a dynamic world,knowledge should be consistently upgraded through a set of exams.

Lastly,we are suggesting common disclosure norms for agents selling financial products. For instance,an agent must tell the customer what are the costs involved in a financial product? How much commission will the agent get? What is the expected rate of return in certain products? In this,we are suggesting that there should not be any commission embedded in the financial product and the country should not move to the next level of a fee-based structure.

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Finance products still need to be pushed and thus agents play an important role. Do you think the time has come to graduate to the next level?

The committee certainly appreciates the work done by the agents in the last 50 to 60 years. However,at the same time we think it is time that the financial sector in the country graduates to the next level. You are talking on behalf of 3 million agents but how about 188 million investors who get affected by mis-selling and other frauds that take place in the financial world. We have to empower investors. The insurance and other financial service verticals have been in existence for more than 60-70 years in the country. How much more time do they need to mature? At 65,you become a senior citizen,can you afford to say that you are maturing now? Are you still going to wait for another 25 years and still continue to push the product to an individual who doesnt understand financial products? Therefore,we are also insisting on financial education.

But customers in India are still not that savvy.

Indians are extremely savvy in financial matters. We are far more savvy in our personal finance than any other person in the world is. Thats why we have quoted in our report,of the total savings of 36 per cent in the country,30 per cent belong to the households. And if Rs 15,000 crore is being doled out as commissions to agents,shouldnt somebody be looking into this? We are just suggesting a more transparent manner of conducting the business.