New Delhi: A government appointed panel has suggested complete phase out of upfront commissions on investment products like insurance, mutual funds and pensions.
"The spirit behind the recommendations is the idea that customers must be treated fairly," said the report of the nine - member Committee headed by former Finance Secretary Sumit Bose.
The report, which has been put on the website of Finance Ministry, said a recurring complaint about the three investment products -- insurance, mutual funds and pensions -- has been their inability to increase their reach to Indian households.
"Related to this has been that the sale of these products is fraught with mis-selling," it said.
Consumer interests, it said, will be served by more transparent disclosures that enable consumers to understand products, compare them, and consequently choose those that serve their interests.
"Upfront commissions in investment products and investment portion of bundled products skew seller behaviour and cause mis-selling and churning. These should be phased out completely," the report recommended.
However, upfront commissions for pure mortality should continue since selling pure life cover is relatively difficult.
Retail financial products must have product structures that allow costs and benefits to be easily understood by a retail investor.
"Costs for similar functions across product categories should be the same. There are three basic functions that a financial product serves - protection, investment and annuity," it said.
In all products, including closed-end and open ended products, other than pension products, the choice of withdrawal should remain with the investor.
The regulator should determine a surrender cost that the investor may bear in such products, the report suggested.
"The cost of surrender should be reasonable. The remaining money should belong to the exiting investors," it said.
On disclosures, the panel suggested that product disclosure should be such that a customer can very clearly understand what it costs and what the benefits are.
"Returns should be disclosed as a function of investment and should disclose the e Internal Rate of Return (IRR) of the product.
"Returns should not be pegged to a third number. For example, returns should not be shown as a percentage of sum assured. NAV should reflect the value of investment which would allow the consumers to take the point to point NAV and arrive at net investment returns," the panel recommended.
The panel said the Government should step up its efforts to improve financial literacy among Indian households.
Observing that investor education seminars being conducted by several bodies and companies are very ineffective, it said the focus should therefore shift to financial education in schools, colleges and places of employment.
At present various financial investment products have varying incentive structure regulated by different financial sector regulators. There is plethora of incentives and charges cap imposed by different regulators making the incentive structure skewed.
Government had asked the committee to study the prevailing incentive structure among various financial investment products. The panel was asked to suggest policy measures such that differential regulatory norms do not favour any particular financial product and prevent mis-selling.
"Cool-off periods for similar products should be the same. Care should be taken that there should be no opportunity for non-naive investors to use the cool-off period to target a market movement," is another recommendation of the panel.
It also suggested tax regimes should be the same for similar products.
Giving more suggestions on costs and commissions, the panel said regulators should be "harsh on manufacturers" that are found to be violating the spirit of the cost recommendations by hiding costs paid to the distributors under other heads such as marketing or business promotion.
"Very stiff penalties and loss of license for repeated offenses should be put in place," it said.
It further said in order to ensure that differential regulatory norms do not favour any particular financial product, the redress available to consumers should be of same high quality across the sector regulators to ensure consumers of products under a particular regulator are not placed at a disadvantage.
"For similar products, there should be a similar structure with regard to Service Tax,Stamp Duty and rural and social sector norms. Like in the case of Applications Supported by Blocked Amount (ASBA) for retail investors in IPO markets, mutual fund NFOs should also have an ASBA process," it suggested.
Also, there is an urgent need to bring the distributors, and their sales employees (and sub brokers), under a regulatory framework.
In its recommendation on Unit Linked Insurance Plans, the panel said mortality and investment should be bifurcated.
For the investor, this would mean a clear understanding of what part of the premium goes to service the life cover and what part of the premium goes to work as an investment.
