Thanks to the various regulators, the financial services industry witnessed some big reforms in the last decade. While we saw the industry adopt technology and improve transparency, we also witnessed some massive setbacks in the form of the NBFC crisis, and frauds detected in the cases of Punjab National Bank and Punjab and Maharashtra Co-operative Bank. The misselling of financial products still continues to happen. Some of these could have been avoided if there was better regulatory supervision. Disha Sanghvi asks experts which regulator scored the most and the least in the decade gone by
Disclosure norms of Sebi at par with global leaders
I would rate Sebi as the best performer. They have taken a transparent approach to rule-making. Sebi’s disclosure norms are considered at par with global leaders. The rules on total expense ratio (TER) balance the need to expand access with incentives of firms. The upshot is sustained growth, with retail consumers contributing over 52% to the assets under management (AUM) of mutual funds.
I would give Irdai the lowest score. Insurance penetration (ratio of premium to GDP) in India continues to be one of the lowest at around 4%. Persistency rates remain stubbornly low. No life insurance company crossed a 90% persistency ratio for the 13th month or 65% for the 61st month.
Unsuitable products continue to be offered to retail customers despite the documented mis-selling events. Grievance redress while existing on paper is challenging to obtain due to processes that require physical presence of the policyholder. I hope the September 2019 market conduct guidelines positively impact some of the practices.
RBI’s oversight of NBFC ecosystem was disappointing
Sebi clearly scores in ensuring consumer centricity. Growing the direct option in mutual funds, bringing about new regulations for analysts and advisors, reducing TER of mutual funds, putting in place trading volatility management mechanisms in stock exchanges, increasing disclosure requirements of companies and putting the consumer first in regulatory approach are definite achievements for the past decade.
From an investor standpoint, the RBI was a big disappointment in the decade gone by. The way the RBI managed the NBFC ecosystem and the oversight should have been more investor-centric.
RBI should have also done more in helping consumers know their credit worthiness and enabling them to get the benefit of lower interest rates on loans. The mis-selling of financial products by banks is another area where much wasn’t done. With the proliferation of products by bank-owned entities in insurance, mutual funds, NBFCs and credit cards, it is an urgent necessity to create more customer-centric processes now.
Scope for Irdai to bring more traditional plan reforms
I believe Sebi along with the support of Association of Mutual Funds (Amfi) has scored the best. At the beginning of the decade, we saw abolition of entry loads. This was followed by reforms for portfolio management services (PMS) and moving from venture capital regulations to alternative investment funds (AIF) regulations.
In 2015, when Amfi saw a rise in sales of close-ended funds, they gave a directive of capping all upfront commissions to 1%. In 2018, the regulator took a step ahead to move to a trail model for mutual funds, bringing both investors’ and advisers’ interests in complete alignment. With the removal of entry loads from mutual funds in 2009, many advisers and banks started allocating more money to unit-linked insurance plan (Ulips) as the rewards for the agents were very high, forcing landmark changes to Ulip policies. This helped in putting a stop to over-selling of Ulips. While Irdai acted pro-actively to address this situation, there is scope to bring more reforms for traditional plans to help reduce risk of wrong allocation to client portfolios.
MF regulations became more transparent under Sebi
Regulations have to be viewed in terms of how regulators have been proactive to customer requirements. RBI has the most important role to play and has done so with considerable finesse in the banking sector. Continuous education as well as building safeguards when using technology has been a primary concern, which has been addressed by the RBI. However, the deposit insurance scheme still needs to be reworked so that it is aligned with the changing reality.
The second important regulator from the point of view of investors is Sebi, where regulations relating to trading in shares and mutual funds have become more transparent and easier with strong systems in place for addressing grievances. The move to introduce side pocketing has been significant. Irdai has been trying its best to ensure that there is reduction of mis-selling. But this is still a work-in-progress. Rera requires some reconciliation. When combined with the Insolvency and Bankruptcy Code (IBC) structure, there is absence of clarity on whether customers can approach the IBC for redressal.
