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IRDA wins the battle to regulate ULIPs

It’s final. The government has decided that the ULIP turf war will be decided in favour of IRDA.

The government has brought down curtains on the two-month long tussle between two regulators by ruling that Unit-linked Insurance Products (Ulips) will be governed by the Insurance Regulatory and Development Authority (Irda).

Ulips account for more than 50 per cent of the life insurance business in the country. The money collected is invested in equities.

An amendment favouring Irda over the Securities and Exchange Board of India was signed by President Pratibha Patil on June 18.

On Friday, the law ministry issued an ordinance amending the RBI Act 1934, Insurance Act 1938, Sebi Act 1992 and Securities Contract Regulations Act 1956, clarifying that life insurance business will include any unit-linked insurance policy or scripts or any such instruments. This has thus settled the issue of regulating Ulips.

The ordinance is also likely to nullify a case filed in the Bombay High Court by an investor seeking to get clarity on the jurisdiction of Ulips. A public interest litigation filed in the Allahabad High Court on mis-selling of Ulips is scheduled to be heard on July 8.

The insurance regulator, headed by J Hari Narayan, now plans to come up with new guidelines on this investment- cum-insurance product on June 21, an Irda official said. Irda will now approve all new Ulips.

Of course, the issue wasn’t really jurisdiction, to most of us. It was that SEBI was a better regulator, and that ULIPs have stiffed people all along. And they continue to do so.

ULIPs collected 46,000 cr. of premium last year, and the commissions will be a reasonably big chunk of it. Plus, it contributes to pseudo-employment. So taking it out won’t be very easy. Still, it’s unproductive – money stolen of our pockets really – and such avenues, like real estate broking, have only resulted in high transaction costs (which, to the economist, is highly displeasing). Deepak Parekh of HDFC – which owns both a mutual fund AMC and an insurance company – even said that ULIP commissions needed to be slashed.

Where India is definitely going is – you will have to pay advisors for advise, and commissions will not be built into products. What that means is a) you can do the work yourself and pay nothing or b) you can get someone to do it for you and pay something.

But till that happens, IRDA will dictate ULIPs. As I mentioned in the Direct Tax Code update, you will be missold ULIPs like nobody’s business till March 2011. I suggest you charge for every call received.

  • Sachin says:

    >thanks deepak, good post, however, is that a typo in the third-last paragraph? "ULIPs collected 46,000 of premium last year"

  • Kasi Viswanathan says:

    >We collectively fail as regulatory authorities , i mean the IRDA and laws are bent and verdicts are favored to suit the money launderers. If the premium collection and laundering is a game of chance, i will go ahead putting my money in some other funds and options which can deliver a foolproof profit.

    What did the IRDA do exactly, sit and watch while the agents plunder others with their hard earned money , by givingn false promises and sometimes nil promise.

    We need serious regulation at all levels of India's way of handling things right from Kashmir to Markets !

    Can the IRDA head react to what he does to regulate the ULIPs and transparency in declaring what goes behind the scenes. SEBI has to be lauded for its efforts and time will again prevail very soon and lets see who dares Wins.

  • Srikanth Meenakshi says:

    >This was most unfortunate.

    Dhirendra has written his mind in a great column, and I agree 100%.

    http://www.valueresearchonline.com/story/h2_storyView.asp?str=101380

    Regards,

    Srikanth

  • Srikanth Meenakshi says:

    >//Where India is definitely going is – you will have to pay advisors for advise, and commissions will not be built into products. What that means is a) you can do the work yourself and pay nothing or b) you can get someone to do it for you and pay something.//

    Deepak, I wish this were true. But it is unlikely.

    This IRDA victory is a game-changing event. Once IRDA does whatever it promised in the form of "reforms" in the ULIP space, it will be business as usual. ULIPs will have higher commissions relative to mutual funds. It will continue to be an opaque product. Since the distribution channels will gravitate towards where the money is, they will continue to be sold, and consequently, mis-sold.

    ULIPs are structurally bad products for the investors. Recent regulatory changes have made them less suited for investors relative to other options available to them. They will now have mandatory five-year lock-in period, mandatory insurance cover and is unlikely to get EEE treatment for taxes (last one might swing either way). Given these, there is no earthly reason that for an investor to choose them as an investment avenue relative to mutual funds.

    The only reason this product will continue to flourish is by commissions and aggressive selling. And these commissions will be built into the product. There is no way this product gets sold otherwise. The industry, the regulator, the distribution channels – they all know it.

    So, the bottom line is that a class of products that is good for the investor (MFs) will be put at a disadvantage relative to a far inferior class of products.

    I think SEBI should wake up to this reality. Zero entry load is here to stay. However, a series of recent regulations that tantamount to literally micromanaging fundhouses in terms of how they can spend every rupee in their kitty should be placed in abeyance. Transparency is good, but regulations intending to send advisors and distributors to the poor house should be abrogated.

    There is a fixed amount of investible amount in an investor's pocket. ULIP distributors/agents/hawks will be aggressively pursuing them going forward (to March 2011 and beyond). If SEBI is truly interested in investor protection, they should get practical and relax the strangle-hold on the MF industry.

    ET's article today says that SEBI was kept totally in the dark on the ULIP verdict till it came about. How the SEBI reacts today (if it does) and what they say in the mutual fund summit in Mumbai on Wednesday will be most interesting.

  • Deepak Shenoy says:

    >Srikanth, you may be right in the short term. In the long term, ULIPs will have to behave, and even the FM has said that he prefers no load products. The IRDA win is likely just a turf battle – they may have extracted a number of assurances that commissions will be slashed, products streamlined and so on.

    I understand your problem with SEBI meddling, being that you're an intermediary that really gets impacted. But the impact is short term – eventually the mutual fund industry will stop paying for assets, and the advisory business will pick up. After enough ticked off people, ULIP sales will dwindle.

    The problem is the advisory business can't scale by much – if you provide personalized advise, you can charge but your costs go up when you scale. If you generalise the advice then you can't charge much because customers dont pay unless its something you do for them. The middle ground is important, and I'm also trying to actively find opportunities there.

    If there was more focus on education, we might avoid future such problems as well.

  • MG says:

    >Well, if at all there's anything good in all this, its this: ULIPs are the best program for financial literacy in the country at the cost of the people that need to be educated. 😀

  • Harikrishna R says:

    >I'm sympathetic to many of the points Srikanth makes. SEBI seems to be setting itself up as some sort of RBI of the investment world and is in serious danger of missing the woods for the trees. But I find it completely absurd to cast the MF industry as some sort of Angel to the ULIP's Devil. The MF industry is guilty of having tried, and where possible, continuing to use, every nasty trick in the book: high upfront fees and commissions, inflated advertorial claims, poorly defended name changes, selective disclosure of statistics, misleading dividend percentages and what have you. The simple fact that Equity MFs as a whole always under-perform the broad market after costs over the long run is rarely highlighted. Even when it is, there is a suggestion that this universal experience somehow does not apply to India and incomplete data is often produced as evidence in support of this claim. Good data that tracks NAVs together with AUM is surprisingly hard to come by, but I'm willing to bet that the Indian Equity MFs as a whole are running negative alpha over the last decade.

  • Deepak Shenoy says:

    >Harikrishna: I think you are wrong about MFs underperforming. Of the top 5 in 2000, all have outperformed the index by 3 to 12% per year compounded in the last five years. The top 5 in 2005 have also beaten the Nifty. I am not sure what you mean by incomplete data – do you have any concrete proof that for any five year period, the top N Indian mutual funds in the beginning of the period have underperfomed the Nifty? No survivor bias – literally every single fund that was top in the last 10 years has survived, even though they've been taken over.

    I've done a lot of analysis that points in the other direction, that mutual funds have outperformed. And the reasons are simple, the top 50 stocks are weighted horribly in favour of some industries (oil and gas, banks) – but the mega gains have been on a broad basis, which means anyone invested in a the second run non index stocks probably beat the index!

    Yes, MFs have suckered us in various ways like you mention. And they have tried their best to do things recently like allocate exit loads to the upfront distributor payments, which SEBI is right to ban (you can't replace an entry load with an exit load – the correct way is to cut off distributor upfront payments completely, and have them do only trail commissions)

    Srikanth might be be happy with a pure trail system – his company can scale in that model very easily and competition will vanish. They may not eliminate trailing commissions entirely, so it's more sustainable.

  • Srikanth says:

    >Deepak/Hari,

    1. I will leave it to you guys to sort out the MF performance issue. Please do let me know how it turns out 🙂

    2. Yes, the SEBI is squeezing every ounce out of upfront commissions, and will not likely stop till it is gone. And yes, we will be happy with a (possible increased) trail since investor and investment retention is our game.

    3. MF industry – I don't want to get myself in trouble here, but let me just say that the regulator has been actively rooting out undesirable practices in the MF industry. While the situation might not be perfect, I sleep well at night know someone is watching the industry for me 🙂

    Regards,

    Srikanth

  • Oracle says:

    >Like the comments on this article. Is there any way that I can read comments also in Google Reader or for that matter in any RSS Feed?

  • Deepak Shenoy says:

    >Oracle: This is the Comment Feed that you can subscribe to. Cheers!

  • Arvind Singh says:

    >With effect from July 1, 2010, the ULIP and pension plans of insurance companies shall be subject to the new IRDA regulations. The new IRDA regulations offer many benefits for ordinary policy holders. It will regularize the high upfront charges and surrender charges, keeping in mind the policy holder’s interest. Under the new scheme, the premium amount remains the same throughout the years, which was not the case earlier. I found an article related with this topic http://www.lawisgreek.com/indian-law-new-irda-regulations-for-ulip-and-pension-plans/