While itself under a cloud over the ill-planned decision to scrap entry-loads on mutual funds without a proper roadmap for implementation, SEBI is now stirring up the insurance industry over their unit linked insurance plans (ULIPs). ULIPs are, indeed, a controversial product and Moneylife has consistently warned investors to avoid them. ULIPs are a losing proposition for investors (except over the very long term, maybe) but are hard-sold because they offer fat commissions to distributors.
But SEBI has watched silently for several years as funds under ULIPs grew exponentially and far outstripped that of mutual funds. It has been stirred into action only because its decision to ban entry-loads had hit the mutual fund industry very hard. The alternative mechanism of trading through stockbrokers has not worked, nor will it be less expensive for investors than paying entry-load. Worse, investors are still paying to buy funds, but the money is deducted directly by banks for holding the investment. The consequence: Rs7,200 crore has flown out of equity funds since August 2009, much of it ending up in ULIPs due to its cowboyish unilateral action, that is, without a discussion with either the intermediaries or investors.
To cover up, cowboy SEBI has struck again. It has shot off show-cause notices to all insurance companies, unmindful of the fact that they report to another independent regulator—the Insurance Regulatory and Development Authority (IRDA). In fact, it has done so mainly because IRDA has strongly defended ULIPs and asserted that these products have been cleared by it. Indeed, an overlap of regulatory jurisdiction is a feature of modern markets. The currency markets are regulated by the Reserve Bank of India and SEBI, while gold futures are regulated by these two as well as the Forward Markets Commission.
We are also not going into the merits of IRDA’s defence of ULIPs and the obscene commissions to insurance agents that are loaded against investors; we disagree with them. But consider how IRDA is rushing off to seek a legal opinion and how all the insurers have gone into a huddle with their regulator to put up a joint front on the ULIP issue. SEBI has no business raking up another controversy with such a knee-jerk action. Firstly, it is far-fetched to label ULIPs issued under the supervision of IRDA as ‘collective investment schemes’ when SEBI failed to follow up its notice to art funds and watched silently while they raised a few hundred crore rupees and also ended up short-changing investors. Isn’t SEBI obliged to check unregulated schemes first? Who will pull it up for failure of supervision?
As for the ULIP controversy, SEBI should have taken up the issue with the finance ministry, since IRDA is also under its administration and it alone has the authority to delineate regulatory turf in situations such as these. Since this is a serious policy issue, was it discussed at SEBI’s 2nd February board meeting? Or was the board busy functioning as a ‘quasi-judicial’ body to protect the chairman? In fact, had SEBI gone to the finance ministry, there may have been a more cogent discussion on other problems with the insurance sector, such as high lapse rates, high rejection of claims, annuity products that have no insurance component and probably need to be classified as mutual funds, and the fact that Indians remain grossly under-insured even when the industry is paying such high commissions to agents.