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Danger in Deregulation

The deregulation of investment products must proceed ifit’s good for customers, and not just to increase investments in the economy.

Last week, I read a very interesting conversation in this newspaper between its Business Editor GautamChikermane and the government’s new Chief Economic Advisor, Raghuram Rajan. While the conversation ranged over a wide variety of topics, what interested me professionally were one set of questions, answers and counter-questions about retail financial products like insurance and mutual funds and the incentivisation of intermediaries in selling them.

The official view, as expressed by Mr. Rajan, always seems to be focussed on these investments’ capital creation role and the resulting economic problem created by customers’ lessening interest in such products, as has happened over the last two or three years. In this conversation too, Mr. Rajan framed the issue similarly, and talks about a solution that involves incentivisingfinancial sellers enough to go out and sell harder. When challenged about higher incentives leading to the exploitation of customers, Mr. Rajan said that shouldn’t happen but that no one would sell for charity.

In recent weeks, there has been a general spin that the slowdown in insurance is because the regulations are too tough and that for the good of the economy, the regulatory environment must be loosened again. Actually, this is argument is utter rubbish. The slowdown in insurance has happened because in its heyday of about 2003 to 2009, the insurance industry and its agents were exploiting customers shamelessly.

The solution can only come if the interests of the investor, the intermediary and the manufacturer are aligned. If the product that’s best for the customer continues to be the one that earns the least for the industry, then that’s a flaw that can’t be overcome. As long as we keep talking about creating incentives for selling, then selling is all we will get. People optimise their economic behaviour, so if the incentive is given for the act of selling, then we will get behaviour that maximises that. Unfortunately, the customer’s interests don’t lie in that direction.