Fish or fowl? What are ULIPs (unit-linked insurance products)? For all the brouhaha over ULIPs last week, the answer is, and always has been, neither! Yet judging by their phenomenal popularity, investors neither knew nor cared! Since they first came on to the scene about a decade ago, ULIPs have enjoyed a rare success.
One can try and hypothesise why: as a part insurance product, part savings product, maybe they fulfill a felt need. Maybe they epitomise the Indian attitude to life in general – a little of this, a little of that and not too much of anything! How else can one explain our fondness for Khichdi or Avial!
Consider. In 2008-09 as many as 7.03 crore ULIPs were sold for a staggering Rs 90, 645 crore (close to 1.3% of the country’s GDP!) while during the last financial year alone (April- February) another 16.7 lakh ULIPs were sold.
All the more reason why the very public spat between the capital markets regulator, the Securities and Exchange Board of India (SEBI) and the insurance regulator, Insurance Development and Regulatory Authority, (IRDA) last week is puzzling. Remember, the present product has been in existence for almost 10 years and an earlier avatar, ULIP 71, a UTI (Unit Trust of India) product with a term cover from LIC has been in existence since 1971.
Needless to say there are a lot of theories floating around. These range from the usual turf-battle theory to regulatory capture of SEBI by a mutual fund industry,(incensed at its business being hit with the whittling down of MF agents’ commissions, even as insurance agents, riding generous commission push ULIPs ever harder), to the more conspiratorial one that sees the hand of the finance ministry in using the spat as a ploy to push through its pet project of a Financial Stability and Development Council to upstage the present High Level Committee on Capital Markets, headed by the Reserve Bank of India .
As with all such theories they will have to remain conjectures. We will now have to await the final outcome of either the court case or perhaps an out-of-court compromise between the two regulators. But what is noteworthy is all this is not the minutiae of the spat but an entirely unintended consequence: overnight investor education!
For years, financial market regulators have been trying to get ordinary investors to take informed decisions when choosing between different financial products. In vain! Whether it is investment in the stock market or investment in an insurance or pension product, few investors care to do any homework before investing, relying instead on ‘tips’. Indeed it is doubtful if many ULIP holders were even aware how much of their money goes to buy insurance and how much is a pure play on the stock market.
Not any longer! After last week’s unseemly spat, triggered by an ill-judged attempt by to force the issue, a whole lot of investors who in the past had never cared to figure out what they were buying, are now wising up. Companies and agents say they are deluged with inquiries. And that is the best outcome of the spat.
Ultimately the storm will blow over but the financial literacy gained will stand investors in good stead. For many investors in ULIPs it might be a costly first lesson but it is unlikely to be one that they will forget easily. At the end of the day, it matters little to ordinary investors whether a product they buy is regulated by X or Y. What matters is that it is properly regulated and there is transparency. So whether SEBI ‘wins’ or IRDA wins, what is essentially a petty turf war is immaterial as far as they are concerned.
The lesson they need to take home is that there is no alternative to financial literacy. The job of the regulator (any regulator) is to frame rules and ensure all players play by the same rules and also make sure there is complete transparency. Once that is done, it is up to the investor to take his own decisions. And live with the consequences!
It is not the job of the regulator to ‘protect’ a man from his own ‘folly’. Not only because what is folly to one may be eminently sensible to another but also because it is not the regulators job in the first place. As financial products become more and more complex, investors need to remember that when it comes to their savings, they must be their own masters!
Source: http://economictimes.indiatimes.com/Opinion/Columnists/Mythili-Bhusnurmath/SEBI---IRDA-spat-Financial-literacy-will-follow/articleshow/5826614.cms?curpg=2
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