Empower retail investor to curb mis-selling: Panel

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New Delhi | Updated: September 03, 2015 9:04 PM

A committee set up by the government to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products has suggested that retail financial products must have structures that allow costs and benefits to be easily understood by a retail investor.

retail investorsA committee set up by the government to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products has suggested that retail financial products must have structures that allow costs and benefits to be easily understood by a retail investor. (PTI)

A committee set up by the government to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products has suggested that retail financial products must have structures that allow costs and benefits to be easily understood by a retail investor.

Seeking same tax regimes for similar products, it also said costs for similar functions across product categories should be the same mutual funds or insurance or pension products.

The report of the panel headed by former finance secretary Sumit Bose, which was set up in November 2014, has been put up in the finance ministry website on Thursday. Its recommendations are sub-divided into product structure, costs and commissions and disclosures, followed by generic recommendations. Besides giving product specific recommendations, it has also suggested that the regulators frame a time-bound road map to implement the recommendations.

The Committee believes that consumer interests will be served by more transparent disclosures that enable consumers to understand products, compare them, and consequently choose those that serve their interests.

The panel said in the investment function, the mark-to-market products must follow the cost structure decided by the capital market regulator. The non mark-to-market products must follow the cost structures of other deposit-like products such asbank deposits, it said.

In all products, including closed-end and open ended products, other than pension products, the choice of withdrawal should remain with the investor, the committee said.

Product specific recommendations

Mutual Funds

#The cost caps within a overall total expense ratio should not be fungible

#Upfronting of commissions should be totally removed

#Distribution commissions should only be paid as level or reducing AUM based trail

#No category of mutual funds should be exempt from the zero upfront (when it is put in place)

#Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital

#The regulator should lower the cost caps as the AUM rises over time

Unit Linked Insurance Plans (ULIPs)

#The product should move to a total expense ratio model from a reduction in yield model

#Upfront commissions should be allowed only on the mortality part of the premium

#There should be no upfronts for the investment part of the premium. The investment part should attract only AUM based trail commissions

#The costs of surrender from a ULIP should continue to be reasonable

Traditional Life Insurance Policy

# All costs should be bifurcated into two parts – mortality and investment

#Investment costs should be capped keeping in view the best practices in the rest of the market

#All charges should collapse into one single charge called the expense charge

#Upfront commissions should be allowed for the mortality part of the premium

#Distribution commissions should not be front loaded

#Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital

#The illegal practice of rebating should be punished harshly by the regulator as it distorts the market

#The current structure of paying upfront commission on single premium insurance policies may be continued for the investment component of these policies

#There should be a clear split of the premium into mortality and investment

#All new traditional plans should conform to this structure. The older plans in the market can get grandfathered. IRDA should work with both RBI and SEBI to mark its existing pools to the market.

#For the loan portfolio of insurance companies, the best practices of loan valuation should be in line with those of the RBI

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