To stop financial products from being mis-sold, a government-appointed committee has proposed the phased elimination of upfront commission paid to agents by April 2011. The recommendation covers all retail financial products and affects 3 million agents that are serving 188 million investors.
The move will be of special significance for the insurance industry since mutual funds and the New Pension Scheme are already no-load products.
"Insurance policies need to remove the bias towards selling the policy with the highest commission," the committee headed by Pension Fund Regulatory and Development Authority Chairman D Swarup said in the draft report released for comments on Wednesday.
The government had appointed a six-member committee to give recommendations on investor awareness and protection. It included officials from the ministries of finance and corporate affairs, Reserve Bank of India, Insurance Regulatory and Development Authority and Securities and Exchange Board of India.
The report takes cues from recent steps in developed markets like the UK, where all products will be no-load from 2012. Australia favours the fee-for model over the commission-based model.
The committee has said the upfront commissions embedded in the premium paid be reduced to no more than 15 per cent of the premium immediately from the current 16.25 per cent. In 2010, this should be brought down to 7 per cent and a zero-commission structure should be in place by April 2011.
"The interim period should be used by insurance companies to help their agents make the transition to a more mature way of selling and advising," the report said.
In the case of mutual funds, last month Sebi did away with the levy of entry and exit loads. Instead, fund houses are now incentivising agents by paying an upfront fee from their pocket and a trail commission of 0.5 per cent of the investment amount.
The trail commission is expected to encourage investors to stay in a scheme for a longer duration. The average duration, even for an equity scheme, is around 12 months.
Similarly, under the New Pension Scheme, no commission is paid to either the fund manager or the point of presence (PoP), the point of interface with the subscriber. Instead, a fund management fee is paid to the fund manager, a transaction charge is paid to the PoP and the central record-keeping agency.
Insurance companies, however, declined to comment on the suggestions saying that they were trying to understand the implications.
The committee has also proposed the establishment of a Financial Well-Being Board of India (FINWEB). The proposed entity will regulate agents and will focus on financial literacy of the population at large.
FINWEB will have two operational arms. The Self Regulatory Organisation (SRO) will work on bringing financial advisers under one common standard. This arm will, however, have powers to penalise erring market participants, including the ability to revoke licence and initiate criminal action. The Financial Literacy Cell will work on making Indians financially literate.
"FINWEB should be a participative organisation, with representatives from government ministries and departments, regulators, industry associations, financial organisations active in the field of financial literacy and investor protection," said the report.
Among FINWEB's functions are preparing a disclosure template that will show the outcome of financial product and costs and risks associated with it. The disclosure will also include the income -- direct or indirect -- that an adviser would earn from the sale and maintenance of the product, both from consumers and from product manufacturers.
The committee recommended that the sales process should be documented and customer profiling will be made mandatory before an adviser sells the product.
"There should be a common minimum entry barrier for all financial advisers," it suggested. If implemented, an agent will need to clear a common examination pattern before he can sell financial products to retail consumers. The existing examinations in mutual funds, insurance and others will continue as different modules within the outcome-specific goals of FINWEB.
It also proposed to bring in licences for advisers to operate and also they should be registered with FINWEB. "For a serious breach of trust, the adviser or adviser firm will face a loss of licence to do business," the report said.
