Indian investors periodically hit the headlines when there is a large blow-up of some product or market. We’ve seen recently a cooperative bank failure. Then a private scheduled commercial bank (those that usually are not allowed to fail) saw its operations and deposits frozen for a few days. Even as the depositors in Yes Bank got their money back, the investors in its AT1 bonds saw their money disappear. These high-risk bonds were mis-sold by Yes Bank managers as FDs to senior citizens among other low-risk investors. Debt mutual fund investors have seen money they thought safe being exposed to excessive risk as fund managers cut deals with promotors, introducing the risk of equity in debt funds. A series of bond downgrades have left retail investors booking large losses over the past year. The latest has been the Franklin Templeton story that saw a liquidity problem become the cause for shutting down six schemes. The matter is now sub-judice since one HNI got a stay. These are the stories that come into the public eye, but there are plenty others that don’t make news simply because the investor is not an HNI or does not belong to a strong group such as a broker lobby.
The impact of the Financial Sector Legislative Reforms Commission (FSLRC) report is already visible in the rush by regulators to put in place consumer protection measures. The Reserve Bank of India’s Charter of Customer Rights (http://goo.gl/ISKD68) was released on 3 December 2014, and the Insurance Regualtory and Development Authority of India’s draft Protection of Policyholders’ Interests (PPI) on 26 December. Comments on the latter will be accepted till 19 January at http://goo.gl/dVOIGL.
As I sit down to write this, a letter comes to my desk. Handwritten by a 90-year-old man, the letter seeks help from Mint’s insurance expert in resolving a fraud carried out by an insurance company agent who sold a policy for his grand-daughter, changing her status from a US citizen to a non-resident Indian and promising returns in dollars. It is the same old story again, of being lied to and being sold a policy that is very different from the one promised verbally. Stories of fraudulently sold policies are pervasive—one does not have to go very far to hear them. While nobody goes on record, every conversation with insurance sector insiders—be it with a chief executive officer, senior management or lower staff—confirms that there is a fire raging in the life insurance market due to very sharp sales practices to sell products that are huge value destroyers for the households. The average return on traditional life insurance products is in the 2-4% range per year over a 10-15-year period. Build in inflation and you get value destruction. First-year commissions are as high as 120% of the first-year premium, leading to predatory sales practices that would be called criminal in any mature market. Insurance professionals also confirm that nowhere else in the world do such value destroying products still exist. And they agree that mis-selling, lying and downright fraud are all used to push sales.
A recent news report (http://goo.gl/Z3BllG ) talked of Prime Minister (PM) Narendra Modi putting his weight behind the rewriting of the Indian financial sector laws. It spoke of the President alerting the PM in early October this year of the shoddy progress being made in implementation of the financial sector reform initiated when Pranab Mukherjee was finance minister in 2010. The story reported that the purge in the Ministry of Finance of bureaucrats last month was due to them stonewalling this reform. Curiously, some of the bureaucrats transferred out were actually pushing really hard at getting the Indian Financial Code (IFC) implemented, but then politicking can be a blunt instrument.
The Financial Sector Legislative Reforms Commission (FSLRC) has written the grid of a brand new regulatory structure. With 16 Acts of Parliament to be repealed and 50 Acts to be amended for the Indian Financial Code (IFC) to become a reality, the political journey ahead is complicated. The ministry of finance took a pragmatic view and used the meeting ground of regulators, the Financial Stability and Development Council (FSDC), to build consensus about implementing those parts of the IFC that need no legislative changes. The eighth FSDC meeting, held on 24 October 2013, approved 12 areas that each regulator will work on to make them IFC-complaint. These include consumer protection, framing regulations, notices, transparency in board meetings, reporting, approvals, investigation, adjudication, imposition of penalties and capacity building. They agreed that these should be implemented quickly. Two months later, on 26 December 2013, the ministry uploaded a handbook that gives guidance to the regulators to help implement these steps with the idea that there should be regulatory harmony so that market failures that occur due to regulatory blind spots, regulatory arbitrage and turf wars are reduced.