'The changes will be good for the industry in the long term'

The Swarup Committee report takes a hard look at the way financial advice needs to be dispensed. Most of the heat is being generated by the recommendation that commissions should be done away with. Do you think the opposition is justified?
When you talk about opposition, we only get to hear about agents or insurance companies losing out. Is anyone talking about the consumer? Why is everyone looking only at the business side of the equation? The terms of reference of the committee are investor protection and this is precisely what we are doing.

Even if one talks of the insurance industry, I think the recommendations will affect it only in the short term (because it will not remain a push product), and it will be good for the industry in the long term. Some countries such as Australia have already gone the no-load way, and the UK might be taking this route by 2012.

Before finalising the report, we held meetings with all the concerned parties—agents, company CEOs, Life Insurance Council, the insurance regulator. In fact, two people from Irda are members of the committee. So it is not as if we have not consulted the stakeholders. The very fact that there is opposition means that we are having consultations. Otherwise, we could have submitted our report to the government incognito and put the ball in the government’s court.

Are there any chances of a change in the prescription after further consultations?
I don’t think there will be any conceptual change. The committee seems convinced that the consumers have been neglected so far and it is the agents and industry who/which have gained. This is the main idea behind the recommendations. Forget about the percentage of commissions being paid; the fact is that I, as a consumer, don’t know how much of my payment is going towards commissions.

The amount of commissions can be debated, but when we said 40%, we only took into account what the Insurance Act states—that up to 40% of the premium can go as commissions. We had actually given examples showing that the rate may vary between 4% and 80% (which obviously takes into account the lapsing rates). We have also given the average, which is 16.25%. Agents claim that they are getting only 15%, but why are they getting even this much? Why has Sebi said there will be no loads on mutual funds? The reason is the lack of transparency.

The committee has been accused — by agents, of course — of not keeping their interests in mind.
If a consumer likes the services of an agent and wants to pay 40%, he has every right to do so. After all, it is his money and it is a bilateral relation between the agent and the consumer as far as commissions are concerned. What we are saying is that don’t force the individual to pay. Insurers say that soliciting business involves a cost and I don’t deny it. The issue is transparency.

Financial products are not like physical products. You cannot compare a commission given in case of a physical product like a car with that of a financial product. At least you can see what a physical product looks like when you buy it. In case of a financial product, you make the payment now, but the outcome might be clear after 30 years.

If you also consider the lapsing of policies, why charge a commission for the life of the financial product when the policy may lapse next year? We included the lapsing rate for precisely this reason—agents charge a high commission in the first year hoping that the investment will last 10-15 years, but for all you know, it may lapse within a year. So the customer loses 40% of the premium.

The issue of loads has been highlighted because people have been affected by it. Our report also talks about broader issues such as bringing in transparency while selling financial products, inter-product comparisons, inter-brand comparison, disclosure of information by insurance agents, etc. We have recommended a regulatory board called the Financial Wellbeing Board of India (Finweb), which should look at the financial sector as a whole. Today, each regulator looks only at its own sector.

One of the recommendations talks about fixing ‘bad outcomes’. How do you intend to do that?
Today, there is no paper trail with the agent. You could buy an insurance product and 10 years down the line the product could go bad, that is, for some reason the outcome could be different from what the consumer was told. For instance, you might have been promised an assured 15% return, but don’t get it. If you call up the agent, he can easily deny that he said anything about an assured return and might just point to the fine print in the policy. So we have recommended that a paper trail be maintained.

Who will maintain the paper trail, agent or consumer?
The onus will be on the customer to maintain the paper trail. However, while selling a product, there has to be the same trail with the agent. It’s a multi-pronged strategy to not just educate the customer but also the agent. Also, when we say that the commission should be in the form of an upfront fee, we will see an improvement in quality of service.

What is the time frame for the objectives to be achieved?
We have set April 2011 for the loads, but the other recommendations will take years, maybe 10, and will be a gradual process. The details about products such as the curriculum for agents will have to be worked out by the Finweb, whenever it is set up. However, the first step is for the government to accept the recommendations. The reason we have projected 2011 for the no-load structure is because once this is implemented, customers will start asking questions. Today, people are either not aware that they are paying commissions or think that it is the insurance company that is paying.

If there is a no-load structure, customers will end up having more money in their pockets. In 2007-8, the amount of money that lapsed (policies that had zero surrender value) and came to insurance companies was about Rs 23,000 crore. Whose money is this? If you add another Rs 15,000 crore paid as commissions, the amount of investors’ money with the companies and agents goes up to Rs 38,000 crore. These are glaring facts and since we are talking about them for the first time in print, obviously there will be opposition.

On financial literacy

Do you think enough is being done to address the broader issue of financial literacy?
As the report mentions, there is a total lack of concept-based financial training. Today, most of the information being dispensed is narrow and product-based. No one is talking of issues like the return after costs, how inflation impacts one’s savings, the real rate of return, etc. We have a situation where even the basic kind of information that an investor or agent should have is missing.

However, there is still a lot of work being done in pockets, and if we have a clearing house like the Finweb to coordinate these efforts, we will do better.

Why can’t there be a common pool of advisers with insurance and mutual funds that can cross-subsidise the entire structure? Do you think this will be possible?
You have raised a much larger issue of coordination between regulators. There is a separate debate going on about this topic and the government is thinking of formalising the arrangement that exists today—a high-level committee on financial markets which is chaired by the governor of the Reserve Bank of India.

As of now, this is only an informal body. The case of Ulips, for instance, has been in discussion for some time but has not been resolved yet. This is also one of the reasons why the Swarup Committee has suggested setting up the Finweb. The regulator will look at the financial sector as a whole instead of governing only one assigned sector, which regulators currently do.