Saturday, June 26, 2010

ULIP row ends; but will investor be a final winner?

With the government bringing the curtain down on the tussle, insurance companies are now free to issue fresh ULIPs and their regulator IRDA can continue to guide them.

The finance minister has kept his word. A fortnight ago he had assured life insurance companies that the dispute between IRDA and SEBI over the regulation of unit linked insurance policies or ULIPs will be resolved soon.

Now the government has ended the row by promulgating an ordinance on Friday stating that unit linked insurance policies with investment component are insurance products which will come under the regulatory jurisdiction of IRDA and not SEBI.
It amended four Acts to make it clear that ULIPs are not securities and they did not form part of collective investment schemes or mutual funds.

These amendments nullify SEBI`s April 9 ban on 14 insurance companies from issuing ULIPs because they are made effective retrospectively from that date. While making it amply clear that SEBI has no regulatory jurisdiction over ULIPs, the government has also ensured that SEBI or any other regulator will not step into the jurisdiction of other hybrid products.

Joint Mechanism
To avoid any similar regulatory turf war in the future, the government has also set up a high-level panel, called a joint mechanism - with representations from RBI, SEBI, IRDA, PFRDA and the government.

It is made mandatory for the regulators to refer to the panel any dispute or difference of opinion over the regulation of a hybrid product. The panel will have to give its decision to the government within three months and it will be binding on all regulators.
The panel appears to be similar to that of the existing High Level Co-ordination Committee (HLCC) of the capital market under the chairmanship of the RBI governor.
The difference is that at HLCC decisions are based on consensus and they are not binding on the members.
With the government bringing the curtain down on the tussle, insurance companies are now free to issue fresh ULIPs and their regulator IRDA can continue to guide them.
Significantly, the ordinance has not only lifted the uncertainty that affected sale of ULIPs, but has also brought relief to thousands of unit holders who were worried about their investments ever since the turf war broke out between the regulators two months ago.

As an insurance company official pointed out, the government could have done this before the issue came to a head and the finance minister directing the regulators to approach the court to get a mandate on who has the right to regulate ULIPs. This would have avoided the two-month uncertainty and the public interest litigations filed by investors.

The IRDA, which emerged as the winner in the battle, is reportedly working on new guidelines for ULIPs. This could probably take care of the interest of investors in unit linked policies.

Investors Interest
The question now is whether the basic issues such as mis-selling and high agent`s commission over which SEBI took up the cudgels on behalf of investors get resolved. Its main contention was that ULIPs are essentially investment products and therefore insurance companies issuing them should take prior permission from the capital market regulator. But the underlying issue was the high commission (up to 30%-40% in the first year) paid to agents by investors in ULIPs.

SEBI was said to be under pressure from the mutual fund lobby as after it banned entry load on MF, their sales came down sharply as agents preferred selling ULIPs.
Though it was an investor protection move by SEBI, it came under flak for its unilateral action.

SEBI`s Achievement
Thought it is perceived that the ordinance has come as a slap in the face of capital market regulator SEBI, it has a score of things to its credit.

It was SEBI`s action that forced IRDA to take up reform of unit linked policies. After the tussle broke out, IRDA has initiated a slew of measures to make ULIPs more investor friendly. From July 1, agents selling ULIP will have to disclose to the customer the exact amount of commission they will get. IRDA has also fixed the minimum term of ULIPs to five years, made life cover compulsory for pension funds, and proposed capping surrender charges.

Now that IRDA has emerged as the winner, it is the regulator`s interest to ensure that policy holders` interests are taken care of - so that the investor becomes the final winner.

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