Several independent regulators of the financial sector, acting separately, have thrown a large segment of the industry into a state of suppressed agitation and turmoil over the issue of commissions to distributors. While their frustration is palpable, industry leaders are unwilling to criticise the move in public because, at least on the surface, it is a customer-friendly move, and who would want to be against it? As with mutual funds, the sharp cut in commissions is expected to hit the insurance business badly too; for some private insurers, this may become a question of long-term survival, unless they quickly find other ways to reach consumers. Then there is the pension regulator, whose chairman, D Swarup, a bureaucrat, put into practice the ‘no commission’ policy for the New Pension Scheme (NPS) right from inception. The financial community believes, that the NPS, although an excellent product (see Moneylife Cover Story, 18 June 2009), has not attracted non-mandatory investment, especially from retail investors, because it has no financial intermediaries to promote it.
Consequently, most people don’t know how to invest in it. According to a blogger, Mr Swarup seems to be under the impression that the NPS is like the public distribution scheme which the needy people will approach in droves as they do for rations. The asset management companies chosen to distribute the scheme are apparently helpless. While cutting outrageous commissions is laudable (as with mutual funds and insurance), doing away with it completely can end up hurting retail investors who are, in fact, the segment that regulators hope to protect and benefit. Without reasonable commissions, retail distribution is an extremely expensive business. SEBI seems to think that the market will find a way. It will—by ignoring the retail investors. The genesis of this attitude is a lack of understanding about the role of brokers, distributors and agents in a market economy. Even today, the government frowns on public sector entities paying any brokerage on transactions in gilts. In the run-up to the securities scam of 1992, the brokers owed allegiance to foreign banks because they were the only ones who paid brokers their due. Recently, the D Swarup Committee has said that 70% of retail investors in mutual funds and 90% in insurance are buying these products on the advice of agents. If so, the attempt to eliminate commissions altogether seems certain to keep away retail investment.