One juicy bone — a Rs 135,000-crore product called unit linked insurance plan (ULIP) that raised Rs 44,611 crore from 1.7 million policies between April 2009 and February 2010.
Two watchdogs — capital markets regulator Securities and Exchange Board of India (SEBI) and insurance regulator Insurance Regulatory and Development Authority (IRDA).
Three million hungry intermediaries — agents, who can get as much as 40 per cent commission on every policy sold in the first year. Meaning, for every Rs 100 you invest, Rs 40 goes into the agent’s pocket and only Rs 60 gets invested.
And 50 million policyholders — the average citizens who are being systematically mis-sold high-cost ULIPs to fill the pockets of agents, insurance companies and the government (through taxes).
Since ULIPs are a creation of insurance companies, IRDA regulates the product. But a ULIP is also a “collective investment scheme” that falls under the purview of SEBI. So, when SEBI passed its April 9 quasi-judicial order restraining 14 insurance companies that have launched ULIP products without registering with it to sell them, the answer came not from companies but from IRDA.
Behaving like an industry association, IRDA, leaning ironically on the same policyholders that it has done nothing to serve, in its April 10 circular, directed the 14 companies to carry on with “business as usual including offering, marketing and servicing ULIPs”.
The first to be hit if SEBI’s order is executed are agents. Many mutual fund agents have moved to selling ULIPs and distorting investor choices, following the August 2009 SEBI order that removed all commissions on mutual funds. But they are only responding to market forces — the incentive structure for agents today is disgustingly-skewed towards mis-selling these high-commissions products, making them dangerous for investors’ health.
The more interesting and pitiable state, however, is that of insurance companies. They are truly the Trishankoos of Indian finance today, neither in heaven nor in hell — if they stop selling ULIPs as SEBI has ordered them to, they lose revenues; if they continue to sell ULIPs as IRDA wants them to, they will break the law. I believe, in the short term, they will stop selling ULIPs for two reasons. First, their lawyers will advise them against fighting the law. And second, most of these institutions have a greater financial and balance sheet exposure to SEBI (through brokerages and mutual funds) than they do to IRDA.
There are four ways to fix this problem. One, a wrestling match on Ram Lila grounds; two, a legal fight that will cost both regulators Rs 2.5 lakh per hearing and make a lot of senior counsels wealthy (on an estimated 50-70 hearings); three, call the regulators to North Block and let the ministry decide; and four, use the instrument of High Level Coordination Committee, get both IRDA and SEBI to sit across the table and sort it out. This is not my imagination running wild, but are real suggestions offered in a December 2005 finance ministry note.
Since the last has been given a burial with IRDA’s April 10 childish circular, the only solution to this inter-regulatory embarrassment today lies with Finance Minister Pranab Mukherjee, who in Budget 2010 proposed the setting up of an apex-level Financial Stability and Development Council (FSDC) that is likely to be headed by him. Its job: among many other things, to “address inter-regulatory coordination issues”. Mukherjee needs to take this SEBI-IRDA fight on board the FSDC. This would be the test case for this institution.
Once it gets there, I am absolutely certain consumers’ interests would be protected. My sense is that investment products from insurance companies would be redefined based on their investment component. So, if a ULIP has less than 25 per cent investment component, IRDA will regulate. If it crosses 25 per cent, SEBI would be asked for a list of things it expects to be in place (no-loads, for instance) and IRDA would enforce it.
Mr Mukherjee, over to you.