Investors get leg-up from ULIP battle
While resolving the regulatory tussle over ULIPs, when FM Pranab Mukherjee on Monday said that India could set a global precedent for a no-load model, he could well have been echoing what the Dhirendra Swarup Committee report had recommended in November 2009, reports Sandeep Singh. See graphicsbusiness Updated: Apr 15, 2010 01:36 IST
While resolving the regulatory tussle over ULIPs, when Finance Minister Pranab Mukherjee on Monday said that India could set a global precedent for a no-load model, he could well have been echoing what the Dhirendra Swarup Committee report had recommended in November 2009.
In the process, Mukherjee has revived the rebuilding of India’s financial sector — this time from the consumer’s point of view. Mukherjee’s push towards a no-loads (when a consumer pays his financial adviser directly and not through a built-in commission structure) world effectively ends the fight over who regulates ULIPs (unit linked insurance products) — Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA).
“I am happy that this has been picked up and it marks the beginning of the change,” Swarup, who has since retired as Chairman of Pension Fund Regulatory and Development Authority told Hindustan Times. “This will be in the best interest of investors. While it will create a level playing field for various financial sectors it will lead them to compete on the basis of their merit.”
“All retail financial products should go no-load by April 2011,” the Swarup Committee had said as part of its game-changing proposals (See box). The upfront commissions should fall to 15 per cent immediately, to 7 per cent in 2010 and to nil the next year, it recommended.
This will bring all products on a level playing field and there will be no incentive for selling one product over another.
Once the financial incentive to sell one product over another — notably ULIPs, where commissions can go as high as 40 per cent in the first year over mutual funds that carry no commission — is neutralised, the rampant mis-selling in the insurance sector would end, the Committee, set up in March 2009, argued.
Predictably, insurers are resisting the move. “If this is the roadmap for the financial sector, then the government will have to take into consideration factors like capital adequacy, insurance penetration in rural areas and investment into the sector,” said SB Mathur, secretary general of the insurance lobby, Life Insurance Council.
The “insurance penetration” he is referring to is irrelevant to ULIPs, where “the insurance component is 2 per cent of the premium paid,” SEBI’s April 9 quasi-judicial order restraining 14 companies from selling ULIPs said. The two regulators will now approach the courts to settle the dispute.