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The tug of war that pays

The tug of war that pays

Who says India is a nation of shirkers? On the contrary, the financial arena is witnessing a relentless tug of war between the leading regulators, each fighting for greater responsibility.

Who says India is a nation of shirkers? On the contrary, the financial arena is witnessing a relentless tug of war between the leading regulators, each fighting for greater responsibility. The bone of contention: unit-linked insurance plans (Ulips). The two contenders: the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda).

The fight has been brewing since 2002, when Irda banned life insurance firms from outsourcing fund management to mutual fund companies. The latest round, however, kicked off with Sebi banning 14 insurance firms from selling or advertising Ulips. In response, the insurance regulator gave the green signal to the companies to continue selling. Finally, the Finance Ministry was called in to mediate. Not that it helped since Pranab Mukherjee simply suggested a status quo and asked both parties to approach the court.

What's the problem, exactly? Since Ulips combine investment and insurance—the former not only grabs a larger proportion of the premium but also has features akin to those of a mutual fund. Hence, Sebi says that the product should come under its purview. On the other hand, insurers claim that insurance is not covered under the definition of 'securities', which is Sebi's arena. Also, the mere existence of an investment feature cannot convert a Ulip to a mutual fund. Neither side is willing to yield ground. Sebi continues with its 'no new Ulips without our approval' stance, while Irda maintains that it's business as usual.

The result is a lot of confused and panicked investors. However, the good news is that this fracas may actually work in the favour of policyholders. In the past, most such controversies, such as the one between the RBI and Sebi for the right to watch over currency trading, have given way to a clear mandate. This tussle, too, may result in some long-awaited financial reforms. Here are some of the positives:

Loads on Ulips may drop: Experts feel that following the spat, the commission structure for insurance products is bound to change, coming at par with mutual funds. The finance minister has said, "India could set global standards by following a noload-plus-fee model for the entire financial sector to ensure a fair deal for all market participants. I hope all regulators work towards this goal." This is a clear indication of where charges are headed.

A clear mandate: The trouble with vague role demarcation is that the areas of overlap may create loopholes that can be exploited. "The RBI looks at banks, but many banks own mutual funds, insurance companies and brokerages. They market these services using their networks and divert customers to ones that are more profitable to them," says Dhirendra Kumar, CEO, Value Research. This tussle has highlighted the need for a body that can resolve such issues amicably without compromising investors' interest. Adds Virendra Jain, president, Midas Touch: "Considering the combination they offer, Ulips need to be regulated by both Irda and Sebi. Multiple regulators are not unheard of. Non-banking Finance Companies are regulated by RBI, Sebi and the Ministry of Corporate Affairs."

Lower misselling: The controversy is expected to lead to a tightening of norms that will generate customer awareness about Ulips, and their misselling, in the long run. It may also lead to greater transparency on how the funds invest. "There is a regulatory vacuum in the structure, management and deployment of investible funds, which is dangerous for policyholders and the industry," says Jain. Also, changes in the commissions paid out to agents and distributors are in order, which works well for policyholders.

All things considered, it's safe to hold on to Ulips.

Tips for newbies
Wait and watch: If you are looking at making a fresh investment in Ulips, it may be worthwhile to wait before you put in your money. The tussle is expected to create new regulations as well as change the commission structure.

The biggest restriction: The only constraint investors could face is while making top-ups since the amount is allocated only to the investment component, not the insurance component.

Don't bet on it blindly: Those who have never purchased a Ulip can continue to avoid them since this is not the most costefficient investment vehicle. However, if you already own this product, there is no reason to get out in a blind panic. The government has made it very clear that investments in Ulips won't lapse.