The conflict between mutual fund industry and the insurance sector seems to be hotting up. The mutual fund regulator Securities and Exchange Board of India (SEBI) has circulated a paper that seeks a level playing field for the mutual funds and their investors with the unit linked insurance plans (ULIPs) offered by the insurance companies.
While the mutual fund industry seeks that they should be allowed to offer insurance as a bundled product with their equity products along with an equivalent commission structure, the insurance industry is of the view that both are entirely different products and there can’t be a level playing field.
In a meeting of high level co-ordination committee on financial markets chaired by Reserve Bank of India (RBI) Governor, YV Reddy on August 1, the committee decided that “SEBI and IRDA should discuss the nature and characteristics of ULIPs and mutual funds and see whether there is a need for level playing field…with respect to tax benefits and regulations governing these.”
Earlier, SEBI had circulated a paper seeking a level playing field for mutual funds with ULIPs with respect to expenses, tax benefits and regulations governing the product, marketing and operations of the business. IRDA has already responded to the SEBI paper.
“ULIPs are similar to mutual funds but has a insurance product and has an expense ratio that is significantly higher than what it is for the mutual fund industry,” said the chief executive officer of a mutual fund on the condition of anonymity. “This leads to a higher distributor compensation and therefore a non-level playing field.”
A level playing field for the mutual fund industry would mean that mutual funds should be allowed to offer insurance products to be provided by insurance companies that are regulated by the IRDA. The insurance has to be bundled with the equity product of the mutual fund.
“The level playing field will also have to be in terms of the expense ratio,” said the head of a large mutual fund.
Both mutual funds and insurance are largely driven by distributors recommendation. But the commission structure is skewed towards insurance. While a distributor gets up to 40 per cent as commission on the first year premium by selling a ULIP, he gets just 2.25 per cent by selling a mutual fund.
“Because of the commission structure there is a big advantage for the distributor to sell a ULIP,” said Jaideep Bhattacharya, chief marketing officer, UTI Asset Management. “Also, mutual funds are not allowed celebrity endorsement while insurance companies are.”
Predictably, insurance company heads feel that insurance is an entirely different product. “A level playing field should be there in the same line of business but ULIP is entirely different from a mutual fund and so the solvency and investment requirement of the two are entirely different,” said P Nandgopal, CEO, Reliance Life Insurance.
“Mutual funds think that the life insurance companies are there to steal their future,” said Rajesh Relan, managing director, Metlife India Insurance.
The other argument being made by insurance firms is that if there has to be a level playing field then insurance companies should be allowed to accumulate assets the way the mutual fund companies do.
“About 70 per cent of the mutual funds’ money comes from corporates,” said the head of an insurance company. “We are only looking at the retail market.”