At the heart of the savings and investments sector, there is a large regulatory anomaly that is likely to cause grave harm to the average Indian saver. The alarming part is that far from recognising and eliminating this anomaly, even its existence doesn’t seem to be officially recognised.
Here’s the problem. Readers of this magazine often hear us talk of ‘the Indian mutual fund industry’. However, there are actually two mutual fund industries in India. The two are regulated according to completely different standards by two different regulatory bodies. They have wildly divergent standards of transparency. The costs and the commissions charged by the two are on very different scales.
However, they are both competing for the same money from the same customer for much of the same purpose. The two industries have different names -- one is called insurance and the other mutual funds.
By now it’s very clear that India’s so-called life insurance industry is actually a high-commission, low transparency version of the mutual fund industry. The pure insurance part of their business is an increasingly small fraction of insurance companies’ activity and plays zero role in their high-power advertising pitch.
Why am I so against insurance companies’ investment centric products? The reason is simple, these investment products-ULIPs-are a rip-off.
Basically, ULIPs are mutual funds with a little seasoning of insurance added to fool the law. Unlike regular mutual funds, the insurance industry is able to sell them under a very high commission structure. In India, all investment products-ranging from small savings deposits to mutual funds-the commission for selling as well as the fee for investment management ranges from a fraction of a per cent to at most two or three per cent. However, by disguising their mutual funds as insurance, life insurance companies get away with commissions in the range of 30 or 40 per cent and sometimes much more.
A vast majority of the life insurance business in India is now ULIPs. The Indian insurance industry is not about insurance any more. It’s about luring people to buying high-commission and high cost investments. The problem is that the high margins in these products can pay for high-pressure sales and advertising that reasonably-priced investment products cannot match.
The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office and many other asset types is ending up in ULIPs, where a good proportion is diverted to pay commissions. There is simply no logic why the investment component of ULIPs should be treated any differently from any other type of investment.
Which is where the regulatory arbitrage comes in. SEBI, RBI and PFRDA, which regulate most other financial products are very different kind of regulators than the IRDA, which regulates the insurance industry. The IRDA is simply less interested in the well-being of the insured and more in the well-being of the insurers. This is not a minor problem—it’s a huge regulatory failure, and the real on-the-ground situation is that it’s not going to change any time soon. The insurance industry is very influential in Delhi and its huge advertising spend ensures that the media too treats it quite gently. If the regulatory framework won’t change then how are investors to be protected from ULIPs?
Well, I don’t know about ordinary investors but you, the readers of this website, are surely of a different level. You know the reality of ULIPs, so don’t fall for them.