The debate is whether ULIPs, which are nothing but mutual fund schemes with the added protection of an insurance cover, should be regulated by Sebi or by IRDA. Sebi, the capital markets regulator, has pointed out that the attributes of ULIPs are very different from traditional insurance products, which is correct. But barring 14 insurance companies from selling ULIPs, was — to say the least — a hasty and thoughtless move on Sebi’s part, and could have created panic among millions of small investors. Regulators need to be far more restrained even if they are in the right.
Indeed, Sebi’s claim is valid because ULIPs are essentially capital-market products since the bulk of the premium is invested in equities or stocks or fixed-income instruments such as bonds. And that’s how mutual funds too are designed. The main reason why ULIPs became more popular than mutual funds was because life insurance companies were allowed to pay their agents huge commissions of anywhere between 30 and 40 per cent of the premium in the first year and almost as much in the subsequent years. Investors for their part were lured by the potential returns from the stock market and the added comfort of the term insurance policy.
With commissions so high, it was, and probably still is, far cheaper to buy the mutual fund element and the term policy separately. After all, the commissions are deducted from the premium paid and only the balance is allocated towards investments and the term policy. But agents have managed to convince investors otherwise. The success of ULIPs has left life insurers with large pools of premiums that have found their way into the stock markets; they’re estimated to have pumped in close to Rs 60,000 crore into equities (gross) in 2009-10. In contrast, with Sebi banning entry loads on mutual funds, in August 2009, it’s not surprising that they saw outflows for six or seven months thereafter. Life insurers are becoming a big force in the stock market; in a couple of years, their purchases of stocks could match the inflows of Foreign Institutional Investors (FIIs) who have been the dominant players so far, having bought Indian equities worth $17 billion in 2009.
It’s a fact that ULIPs have been around for a while now and Sebi could have raised the issue earlier. Nevertheless, late or not, since ULIPs are high-risk products, similar to mutual fund schemes, Sebi has a point in saying that one needs to keep an eye on the products. But, while Sebi does have the expertise to keep track of ULIPs, since it already watches over mutual funds and could do a good job, it might also turn out to be somewhat messy since there is also an insurance component.
There could be a solution. The finance minister announced a Financial Stability and Development Council (FSDC) in February this year, expected to play the role of a “super-regulator” though the government has not said as much.
The FSDC could come up with common rules for similar products in the capital market. Essentially, what’s needed is a team comprising members from the government, Reserve Bank of India, Sebi, IRDA, PFRDA and maybe even the Company Law Board which can together sort out controversial issues especially where there’s a regulatory overlap. One such team already exists; the HLCC (high level co-ordination committee) which is chaired by the RBI governor and has representatives from all regulators. The HLCC should perhaps have been a little more alert and taken cognisance of the differences between Sebi and IRDA; after all they had surfaced some time back, and in January Sebi issued show cause notices to life insurers. Indeed the HLCC needed to have looked into the commission structures for ULIPs to ensure a level playing field for financial intermediaries: the IRDA has been more than generous to agents at the cost of investors.
The HLCC has remained a discussion forum and perhaps could be given executive powers because it doesn’t really make sense to create one more authority — unless the government believes that the FSDC should be armed with the necessary powers and play super-regulator. It doesn’t matter too much which of them, the HLCC or the FSDC, has the powers as long as nothing falls between stools. The idea, after all, is that they come up with the right solution as fast as possible. And chances that such teamwork will result in workable solutions.
The writer is Mumbai Resident Editor, ‘The Financial Express’