As financial consumers, do you know your Unit-linked Insurance plan from equity mutual funds? Well, if you are a savvy investor, you would definitely know that these are competing products. But have you ever questioned why these products are touted at different sales incentives and obey different sales processes? While the government’s agenda on encouraging people to invest in the National Pension System has given rise to a new independent regulator, why then should insurance companies be allowed to advertise and sell pension plans that have low returns and high incentives?
Also, despite the entry of 28 players in the insurance sector, India remains the most uninsured country in the world. Have you ever wondered how Vijay Mallya’s now infamous Kingfisher Airlines alone managed to owe Rs 7,000 crore to the the exchequer? How do ex- Congress MPs, the likes of Lagdapati Rajagopal and erstwhile Chairman of Hyderabad-based Lanco, now infamous for his pepper spray trick on parliamentrians, could manage Rs 9,000 crore as part of corporate debt restructuring before the 2014 general elections?.
These and many more pertinent issues were broached by guest speaker Ms Sucheta Dalal who, while borrowing from PM Modi’s ‘Swachh Bharat Abhiyan’ has implored all to adopt a ‘Swachh Abhiyan’ for the financial sector too. A new thinking, but a step nonetheless that could help pick out the warts that have systematically left consumers high and dry despite an industry that prides itself on services provided by wellfunded institutions supposedly guided and regulated by independent regulators.
Despite the Ministry of Finance and the Ministry of Corporate Affairs heralding affairs, in the absence of a diligent consumer redressal system, taming the onslaught of institutionalised sales for financial products does seem a tall order.
Who Will Bell The ‘R’ Cat?
Despite regulations, there is an underlying Catch-22 situation, points out Sucheta. “Regulators are tasked with registering and monitoring financial service companies, approving products that are fit to be launched and resolving consumer grievances. But the four financial regulators function in vastly different ways, leaving consumers perplexed,” she revealed. She explains that since the advent of the Securities and Exchange Board of India (SEBI), one of the first indpendent regulators that was created, the stage was set for discerning bureaucrats who had earlier resisted giving up their powers in the ministerial offices but were now very happily switching roles for career extensions that promised better perks and more freedom under SEBI’s mantle.
The Ailing Investor
Planning an investment has never been so easy as the retail market is strewn with almost all kinds of financial products that are positioned to fulfill long and short term investment goals. But with an archaic financial regulatory system that is more ‘disclosure’ based, savers are often confused with the smaller print which they are expected to read, interpret and accordingly act rationally.
Diagnosed Ailments
Aw aiting A New Dawn
It took the much disastrous 2007-08 global financial crisis to bring in new regulatory philosophies on financial literacy that marked the beginning of a caveat venditor (seller beware) approach. But based on behavioural economics, Sucheta says, “ …..the rational economic man does not exist and most people are simply not wired to understand financial products.They tend to translate their experience of buying consumer goods to financial products…” She quotes Martin Whaeatley, CEO of Financial Conduit Authority in the Financial Times, who said “…Investors cannot be counted on to make rational choices so regulators need to ‘step into their footprints’ and limit or ban the sale of potentially harmful products…”
‘The industry continues to battle age-old maladies of bad loans, reckless lending, political interference and adverse selection that has led to higher tax burdens and inflation index for the poor in India’
Through the Looking Glass Sucheta‘nomics’
With the poor performance of independent regulators, the previous UPA government had sought to revamp the Financial Legislative Reforms Commission (FSLRC) under Justice B N Srikrishna (former Supreme court judge). FSLRC’s suggestion was for a unified financial sector regulator comprising the SEBI, IRDA, FMC, a part of RBI along with a unified Financial Sector Apellate Tribunal (FSAT) that could hear all appeals against financial sector regulators.
Financial ‘Sw achh Abhiyan’
The government needs to check its selection criteria while appointing regulators or bank chairpersons to enforce accountability of various financial ‘watchdogs’ and allied sectors. She also says that the buck stops at he RBI’s door. The RBI can no longer air-brush the real reasons behind bad loans by merely acting as a spectator in the entire gameplan but take concrete steps to pull out the consumer out of the viscious debt cycles.
While the list is endless, Sucheta is optimistic that her proposal of cleaning up of the financial sector be taken up at the higher echelons. She sums up, “…For the savers, this consists of making retail products simple and grievance redressal effective. As for banks, we need strong acountability. Otherwise, for the next 20 years we will continue to see exactly what we have seen over the last 20.…”
By Sangeeta Ghosh Dastidar
