The Securities and Exchange Board of India’s (SEBI) decision to scrap entry load has axed the fat commissions earned by large mutual fund distributors, especially banks. The commissions will now have to be negotiated with individual clients. SEBI’s action has sparked a furore in the fund industry, led by agitated banks that had got used to easy commissions. Will the move affect banks’ attempts to widen their hold over insurance selling as well? There is good reason to hope so.
After the opening up of the insurance industry, banks have been distributing insurance products as corporate agents through Bankassurance (the process of selling insurance through the local banking network). Insurance Regulatory and Development Authority (IRDA) regulations permit each bank to distribute insurance products for any one general insurer and any one life insurer that they represent. They cannot operate as brokers. Banks (through the Indian Banks’ Association) and insurance companies have been lobbying hard with the regulator to be permitted to expand their role and sell multiple insurance products through their combined network of 65,000 branches and 300 million retail customers. They claim it will increase the penetration of insurance products. The effort has succeeded in getting IRDA to appoint a panel of insurance experts to re-examine the regulatory structure that does not currently permit multiple tie-ups. If this is permitted, banks will virtually become insurance brokers, without being subject to the stringent regulations, disclosures and tests that are applicable to brokers.
Naturally, the 260 licensed insurance brokers, who form a part of the Insurance Brokers Association of India (IBAI), are strongly opposed to the move. They say that banks have no expertise in insurance and will only end up pushing products to earn commissions. The mutual fund industry already provides an excellent example of how gullible investors were misled into churning their fund portfolios and investing in new fund offerings (NFOs) that paid higher commissions to distributors which affected the returns earned by investors.
Has IRDA learnt no lesson? If it allows large nationalised banks to sell the products of 40 insurers (who offer significantly higher commissions than mutual funds) as corporate agents, with no accountability for their advice, is it putting ordinary people on the road to disaster? IRDA could argue that its panel of experts will recommend stringent regulations to ensure that there is no mis-selling of insurance, but the panel entirely comprises insurance industry representatives. It is important that a move, as important as this, must take into account the views of all stakeholders, including insurance brokers, insured companies and individuals, as well as the Reserve Bank of India which is not in favour of banks foraying into non-core activities. In fact, instead of rushing to relax rules on insurance selling, IRDA needs to re-examine the commissions and misleading sales pitch of unit linked insurance products (ULIPs), in line with SEBI’s action on entry loads.