The Lok Sabha on Monday passed the Securities and Insurance Laws (Amendment) and Validation Bill, 2010 that would pave the way for setting up a joint mechanism to resolve differences among the various regulators in the financial sector.
Once passed by the Rajya Sabha and then notified in the official Gazette it would replace the Ordinance that was promulgated last month, which provided IRDA the power to regulate "life insurance business," which includes hybrid insurance products like ULIPs.
The Bill provides for setting up a joint body under the chairmanship of the finance minister, and with representations from the four financial sector regulators and the finance ministry.
Finance Minister Pranab Mukherjee said the committee will handle only disputes and efforts would first be made to solve these issues among the regulators themselves.
Will use power only when needed
What are ULIPs?
Unit linked insurance products (ULIPs) are products, where a tiny part of a policyholder's money is used for protection, with a large chunk being invested in equities. ULIPs account for more than half of the life insurance business.
What is the problem?
In April, stock market regulator, SEBI banned 14 life insurance firms from issuing fresh ULIP schemes.
SEBI said it should have the powers to regulate ULIP schemes as they operate through stock exchanges and invest in securities.
Insurance regulator IRDA retorted by asking the life insurers to ignore the SEBI order.
What did the finance ministry do?
In June it promulgated an Ordinance allowing IRDA to regulate ULIP schemes. The Bill that will replace the Ordinance, empowers the finance minister to be the final arbitrator to sort out all inter-regulatory conflicts.
What you should do
With the passage of the ULIP Bill in Lok Sabha, it is only a matter of time that it becomes law. With a lax IRDA looking on, insurers and their agents have turned ULIPs into an instrument of mass wealth destruction, with its 40 per cent first year upfront commission, churning every three years and product opacity.
"Investors should buy only a term plan from an insurance company, so they get maximum protection at least cost," said Amar Pandit, a Mumbai based financial planner. "They should make their investments through mutual funds which are better performing, more flexible and cheaper." This way you get the best of protection and returns.