Sebi's New Directive - A welcome move but much more needs to be done

SEBI has issued a directive to all private life insurance companies not to issue any offer document or advertisement soliciting money from investors for a ULIP or any product having an investment part in the nature of mutual funds, till they approve of the same. This directive is the latest in a series of initiatives taken by the market regulator to put an end to all unfair market practices and make the process of investments simple, fair and cost efficient for an investor. While the immediate fallout will be negative for all the 14 private life insurance companies as ULIPs form a major part of the new business written by these companies in the recent past, yet we feel that this is a welcome step as it puts an end to the unfair practice of pushing life insurance policies as investment products to gullible investors. In the current market practice investors end up paying very high charges for the investment part of these policies and are usually not aware of the expenses they are paying. This is because unlike a normal share or mutual fund investment there are usually a myriad of charges in a ULIP product hidden behind numerous provisions and clauses which are sometimes not easy to comprehend even by insurance professionals. Hence common investors have very little chance of ever getting an accurate picture of the costs they are incurring on these insurance and investment combination products.

While we appreciate this move and broadly agree with the concerns of the regulator it is also important to look at some possible negative implications of this move. Firstly this process of another regulatory approval might take away the sheen from these products. Insurance companies may not be inclined to offer these products if the regulations are very tough and costly to comply with. ULIPs have done an enormous contribution in directing some part of the long term domestic savings to our capital markets. Even if these investments are coming at a high cost and in some cases without proper risk disclosures, yet this is perhaps one of the very few avenues through which a number of common investors are comfortable taking an exposure to the capital markets. Since capital markets still attract less than 5 percent of the domestic savings and keeping in mind that a higher contribution from this segment will not only help in stabilizing our financial system but also assist common investors in combating inflation in the long run, we hope SEBI makes the process of registration of new ULIP offerings fairly simple and transparent. The need of the hour is a fine balancing act between stringent regulation on one hand and encouraging investors to increase their insurance cover and putting a proper share of their long term savings in the capital markets on the other hand. Along with these directives SEBI must ensure that the new regulations are fair and proper. Also efforts on increasing investor education and awareness of concepts like financial planning and human life value must be initiated by the regulator in a structured manner very soon. Otherwise despite all good intentions the latest directive will end up harming instead of benefiting investors in the long run.