Round two of the spat between Irda and Sebi has gone to the former. An ordinance passed late last week hands over the control of Ulips to Irda; jurisdiction over these hybrid products will now clearly lie with the insurance regulator. To remove any kind of ambiguity, the government is also understood to be amending portions of the Sebi Act, relating to collective schemes, such that these will not include Ulips or any other schemes that combine investment and insurance. This is not confirmed yet but that?s clearly the way forward; dual reporting can be a terrible thing and the last thing we need is for mutual funds and insurance companies to be confused about who they?re regulated by and investors getting jittery about their savings.

By amending the legislation, which needs to be ratified by Parliament, the government is putting an end to unseemly squabbles between financial regulators. Indeed, the manner in which Sebi passed an order, in April this year, asking 14 private-sector life insurers to take its permission before they launched any new schemes, was quite shocking. It?s true that Ulips are nothing but mutual fund schemes with an added element of an insurance cover whose risk cover is limited to a minuscule share of the premium. But the capital market regulator could have called for a white paper on the subject or initiated some kind of discussion on who should be regulating Ulips.

While Sebi and Irda squabbled, the High Level Co-ordination Committee on financial markets (HLCC), chaired by the RBI governor, didn?t really do much; watching helplessly since it doesn?t have executive powers. The HLCC could have looked into the commission structures for Ulips in order to ensure a level-playing field for financial intermediaries but didn?t really come up with any ideas. However, it seems unlikely now that this committee will get teeth since a high-level committee, to be headed by the finance minister, and comprising the RBI governor and heads of Sebi, Irda and PFRDA, is to be set up. That has been in the offing?the Financial Stability and Development Council (FSDC) was announced some time back. Ultimately, it doesn?t really matter which committee has the powers, as long as nothing falls between two stools. What the FSDC must ensure is a level-playing field across financial instruments; Irda has allowed agents to charge exorbitant commissions of anywhere between 20% and 40%, at the cost of investors. The mis-selling, too, needs to be stopped.

Irda has been talking of bringing down commissions on Ulips, but just bringing them down is not enough; they need to be brought down sharply, given that entry loads for mutual funds are now banned. Life insurers, too, need to bring down their expenses and this needs to be monitored the way costs and mutual funds are tracked. So far, it would seem that Irda has been a rather liberal regulator while Sebi has been a strict one. This is evident from the kind of money that life insurers have been able to pick up from investors; in 2009-10, they are estimated to have mopped up some Rs 2.6 lakh crore as insurance premium and four-fifths of this was accounted for by Ulips. In contrast, mutual funds have seen outflows from equity schemes in all but three in the last 10 months since entry loads were banned. In the last one year, barely Rs 3,000 crore have come into equity schemes; total

AUM in equity schemes is just over Rs 2 lakh crore.

This clearly has to change and while Irda has made the right noises ever since Sebi attacked its turf, it needs to do much more. It has already brought down surrender charges and upped the risk cover, and there is talk that life insurers will offer guaranteed returns so that those investors who are willing to settle for lower returns, have a choice. Pension funds have to be bundled with either a life cover, health cover or annuities. Also investors in Ulips need to have access to a variety of investment options; for instance, life insurers could offer them Index Funds. If commissions come down, then premium collections will also come down. However, since there will be some commission, Ulips will be pushed more than mutual funds. It?s possible that because the government wants the state-owned life insurer not to lose out, too?it has yielded ground to private sector players. Had the jurisdiction of Ulips been handed over to Sebi, and commissions been done away with, LIC would have suffered. So, in that sense, it?s fine that Irda will supervise Ulips. This is possibly the best solution. But the FSDC needs to keep an eagle eye on what is happening, otherwise investors will lose out.

shobhana.subramanian@expressindia.com