Opinion ULIP mania
Sebi-IRDA spat ends with a positive move,but its just a start..
For the time being,the controversy surrounding ULIPs seems to have been defused by the promulgation of the Securities and Insurance Laws (Validation and Amendment) Ordinance,2010,in which the government has unequivocally supported the claim of the Insurance Regulatory and Development Authority or IRDA to regulate unit-linked insurance plans. Yet many voices,claiming to speak for policyholders,have been raised against this move.
The ordinance has amended provisions of the Insurance Act,1938,to clarify that ULIPs of all kinds shall form part of the life insurance business. In addition,the Securities Contract (Regulation) Act,1956,and the Securities and Exchange Board of India Act,1992,have also been amended to clarify that ULIPs shall not be construed as securities or collective investment schemes,including mutual funds. The ordinance also provides for a mechanism whereby any dispute relating to the jurisdiction of regulatory bodies such as Sebi,IRDA,the RBI or the PFRDA (for provident funds) shall be referred to a committee consisting of the finance minister,the finance secretary,the secretary (financial services) and the chiefs of the regulatory bodies. The determination of the joint committee shall be binding on the regulators.Sebi claimed to derive its right to regulate ULIPs by contending that ULIPs,which are similar to mutual fund schemes,fall within the definition of securities. Further,it contended that since Sebi is empowered to regulate mutual funds,all schemes in the nature of mutual funds require registration with Sebi. Many who supported Sebis move believed that its regulatory supervision would improve the delivery of ULIPs. Moreover,Sebis track record in protecting and promoting the interests of consumers while regulating mutual funds provided comfort to many that they would be able to achieve the same result with ULIPs. The arguments were emotive; and the ambiguities in the law allowed Sebi leeway to assert its role in regulating ULIPs. IRDAs inability to prevent and regulate mis-selling of ULIPs provided moral force to Sebis move.
On the other hand,insurance companies felt that it was unfair to subject them to regulation by multiple regulators with differing regulatory goals. In times when it has become fashionable for the government to set up independent regulatory authorities to regulate all forms of businesses,an overlap in jurisdictions is a likely scenario. For effective regulation,it is important that the roles of each regulator are clearly demarcated. Whether insurance companies should distribute ULIPs is a policy decision a call that the executive is entitled to take within the given legislative framework.
A single regulator for a single business is the ideal principle of financial regulation. The philosophy has been set out in the Sebi Act itself,wherein categories that are regulated by different regulators have been excluded from the regulatory supervision of Sebi. The RBI has also exempted several categories of non-banking finance companies that are regulated by Sebi and IRDA from its regulatory supervision. The ordinance has merely confirmed that position.
The joint mechanism is a positive step,but appears to be an ad hoc exercise. Much more could have been achieved by conferring more powers on the body. Under the ordinance,the joint committee merely has the power to settle disputes relating to determination of jurisdiction of the regulators in cases of hybrid and composite financial instruments.
Conflicts between regulators,however,take many other forms. The ULIP controversy has shown that regulation of similar instruments by multiple regulators with different regulatory philosophies could perpetrate arbitrage. When commissions for the mutual fund distributors dried out,they immediately shifted to ULIPs,often at the cost of ultimate consumers. The joint committee could also have been empowered to address such instances,so that different regulators may discuss and synchronise their regulations for similarly designed products,or common distribution networks.
Obviously,such an exercise would have required more wide-ranging amendments in the laws that have been amended. One hopes,however,that this is merely the start,and once the bill comes up in Parliament,more teeth are added to it. The experience from the functioning of the joint committee could also be a starting point for a super-regulator for the financial sector.
For now,IRDA required the governments support in protecting an industry that is yet to find its feet in India. The ordinance is,by no means,a verdict on the ability or efficacy of IRDA in regulating the insurance industry generally,and ULIPs in particular. It should be viewed merely as a statement of the governments confidence in IRDAs ability to clean up the mess in ULIP distribution.
The writer is a Delhi-based insurance lawyer
express@expressindia.com
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