The controversy about Sebi trying to regulate Ulips has generally been presented to the public as a case of two regulators struggling to defend
their turf. However, it is much more than that. At one level, this conflict represents a comprehensive failure of the basic architecture of India’s financial regulations. This architecture is based upon Irda regulating insurance companies and Sebi regulating all investment vehicles, which expose investors to market risk. The current conflict arises from the fact that market-linked securities form a bulk of the business of insurance companies.
The conflict is sharpened by the very different rules that Irda and Sebi upon what are essentially identical products. Sebi-regulated mutual funds are far lower in cost, and higher in transparency and customer-friendliness than Irda -regulated Ulips. Sebi’s approach has generally been focused on ensuring a better deal for customers, whereas the Irda is more worried about the health and well-being of the insurance companies and agents. Somewhere around, there’s also a constituency — well-represented in the business media — who see Ulips basically as a way of ensuring a continuous flow of funds into the stock markets.
However, for the alert and knowledgeable investor, who’d like to be careful with his money, this whole fracas is irrelevant. The question of whether Ulips — as currently sold by insurance companies — are an investment-worthy vehicle was settled long ago. No one who has any financial sense would put a single paisa in a Ulip.
Unfortunately, a bulk of India’s investing public is made up of financially illiterate people who obligingly buy whatever is being sold and advertised most intensively. These people are the market for Ulips, and they have been a rich source of funds for insurance companies and their agents. If the regulatory system is not overhauled, then these people will continue to give away their hard-earned money to the insurance industry. There’s nothing anyone will be able to do about it.
Of course, if you belong to the minority of investors who understand and appreciate the real picture (and as a reader of this newspaper you are likely to be), then you can just ignore this whole sorry mess. You are wise enough to have ignored Ulips till now, and that’s what you should continue doing in the future.
However, the current controversy could well be is a turning point in the regulation of India’s consumer finance products. Either the government will decide that the savers’ financial being is the most important thing, or, the rich and powerful insurance industry will settle down with its hands deep in the pockets of ordinary Indians who are completely dependent on the government to protect them.
As far as I can see, the hardest part seems to be admitting the mistakes of the past, of recognising how deeply misguided insurance regulation has been in India. I’m not really sure if the powers that we have will give us the courage to do that.
By Dhirendra Kumar, CEO, value research.