Distribution disarray

In a bid to attract new investors to financial products, Indian market regulators have been tightening the screws on firms to make their products more transparent and cost-effective. But investors don’t seem to be taking much notice of this. A key reason is that the distribution industry, without which new products cannot reach the end-consumer, is in a shambles. Take life insurers who, in response to the Insurance Regulatory and Development Authority’s (IRDA) new rules for traditional policies, have rolled out some 500 new and revised plans in the last one month. But such changes, far from exciting agents, are actually causing disquiet. IRDA’s latest annual report in fact shows that as many as 8 lakh agents — a third of the existing field force — exited the life insurance business in 2012-13. The mutual fund industry has also suffered similar upheavals in the last four years, after the SEBI, with the best intentions, banned entry loads and tightened its scrutiny of new products.

Regulators need to realise that retail investors will not throng to financial products just because there’s a large menu of them available at ultra-low costs. Given dismal levels of financial literacy and internet penetration in India, even the best products need an army of agents to actively market them. The rising complexity and customisation of products also requires serious financial intermediary professionals. Part-timers peddling brochures, filling in forms and collecting cheques from investors can no longer fulfil this role. It is time the regulators take a deep breath and abandon their current obsession with product reform. They should, instead, focus on intermediaries, to address the significant inconsistencies in their regulations.

A good starting point could be commission structures. Why should mutual fund agents, for instance, be banned from taking any upfront commissions when incentives up to one per cent are given on government-backed small savings schemes and tax-free bonds? Incidentally, commissions on market-linked insurance plans remain as high as 15-20 per cent of the first-year premium. Likewise, we have SEBI seeking to reduce conflict of interest by separating commission-earning agents from pure advisors, but IRDA wanting the same bank to sell products of multiple insurers. While mutual fund schemes are sold on the basis of track record, insurers are barred from it and rely only on ‘illustrative’ returns. Multiplicity of marketing practices, commission structures and entry norms across financial products leads to confusion for investors; it also creates perverse incentives for distributors. The latter would obviously hard-sell products offering high incentives and neglect those fetching modest fees. It is time the regulators coordinated their efforts and took stock of what is ailing the distribution industry. Framing a common set of rules on selling practices and incentive structures for all intermediaries may do far more for financial product penetration today than product reforms have done so far.

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