The next time you are mis-sold a financial product, you would not only be able to prove it but also get the agent penalised. According to a proposal being made by the Committee on Investor Protection and Financial Literacy (CIPFL) to the Ministry of Finance, financial advisors will have to produce a paper trail where they will have to sign on the advice given by them and be liable for penal action in case the advice is found inappropriate.
Today, advisors are under no obligation if their advice goes wrong and the investor is left to fend for himself. In fact, apart from an examination, agents of mutual funds and insurance firms are not regulated at all.
The CIPFL recommendations will bring agents under the ambit of regulation. The Committee headed by Pension Fund Regulatory and Development Authority (PFRDA) chairman D. Swarup is likely to put these recommendations for public comments next week. The discussion paper will then get amended and be presented to ministry by end-September.
“The report is looking at aspects of greater transparency, common disclosure norms of financial products, and attempts to bring all financial products at level playing field,” a senior official told Hindustan Times. “It will also regulate the advisors.”
Another major proposal that the committee is looking at is removing commissions from the product. Today, these are embedded into the product and the agent gets a commission from the investment. While the upfront commission on mutual funds has been barred by Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority (IRDA) allows commissions that are as high as 40 per cent in the first year.
These proposals are likely to be monitored by an apex body that will have representation from all regulators — Reserve Bank of India, Sebi, IRDA and PFRDA — ministry of finance, technical experts and independent directors. “This body will work closely with regulators and will define how the intermediaries will operate,” the official said.
A similar committee was formed by the government two years ago under C.S. Rao, then chairman of IRDA. It concluded by saying that nothing needed to be changed. The report was rejected by the government and the Swarup Committee was set up in March 2009.