Ringing in more changes

The financial services industry will see significant changes.

Regulatory changes always have the potential to disrupt the financial services industry. The year 2009 saw important regulatory changes, such as the no-load regime for mutual funds and the New Pension Scheme (NPS). The sale of mutual fund have gone down drastically, as it is no longer considered viable by distributors and agents. At the same time, NPS has not picked up, despite being marketed through the banking channel. But regulatory changes will continue even going forward.

Let’s look at major changes that would come into play in 2010:

 

Phasing out existing unit-linked insurance plan (Ulip) products which do not conform to Insurance Regulatory Development Authority’s (Irda) cap on charges 
 

Medical insurance portability 
 

Extended trading hours on the stock exchanges.

ULIP CHARGES
Irda issued a circular to the life insurance industry on July 22, capping overall charges in Ulips.

 

If a person invest through Ulip, he ends up paying extremely high charges. The structure of these charges are also very complex in Ulips. To clear this confusion and to enable policy buyers to have a clear understanding of product costs, Irda has prescribed one cap on all charges put together.

Irda's cap is expressed in terms of the difference between the gross and net yield to the customer. The net yield is the gross yield, adjusted for all charges. For insurance contracts of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For contracts above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.

Additionally, the following should be observed:

Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges and any explicit cost of investment guarantee shall be excluded in the calculation of net yield. 
 

At the time of maturity, the insurer must issue the policyholder a certificate showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder, taking into account partial withdrawals, if any. In addition, this certificate must also show the actual gross yield and net yield, taking into account the actual charges deducted.

The circular was effective from October 1, so that all products approved by Irda on or after that date would be so governed. All existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31.

This means that starting January 1, 2010, one will see Ulip products with lower charges compared to earlier times, but they will still continue to be high by any logical standards.

MEDICAL INSURANCE PORTABILITY
Mediclaim policy holders who were dissatisfied with their general insurers had no real recourse or choice when it came to changing insurers. They would stand to lose all the no-claim bonuses and track record established for coverage of pre-existing illnesses. Thus, one had to either suffer with the same insurer or lose benefits by opting for another insurer.

Under medical insurance portability, a person dissatisfied with his general insurer can change to another one without losing benefits. However the catch is that insurance policies vary across insurance companies at this point of time. The General Insurance Council (GIC), an association of companies in the segment, has worked on recommendations that will allow a minimum benefit value to be transferred to the other company.

Let's say your sum assured on the policy is Rs 2 lakh and the bonus accumulated is Rs 1 lakh. This would mean your present cover is Rs 3 lakh. Under the current regime, you lose the no-claim bonus. However, under medical insurance portability you could transfer Rs 3 lakh or a lower value (subject to minimum benefit) to the new insurer.

All this was set to change in 2009. However, there were a lot of issues, such as bonus transfer calculations, data exchange, medical testing requirements and soon, that were the subject matter of debate. Therewere no standard practices across companies. For instance, one company covers pre-existing illness after two years, whereas the other will cover it after four years. Hence, this critical change will probably see the light of the day in 2010.

EXTENDED TRADING HOURS BY STOCK EXCHANGES
In October, the Securities and Exchange Board of India (Sebi) allowed bourses to set their trading hours between 9 am and 5 pm, on condition that appropriate risk management systems and infrastructure would be in place. This triggered a competitive battle with BSE announcing it would start its trading at 9.45 am instead of 9.55 am. Following this, NSE immediately announced it would start trading at 9 am. There was a lot of fuss by major sections of brokers, who felt that they were not consulted and systems were not in place. Backlash by brokers, a section of the media and investors saw this move being deferred to January 4, 2010. Brokers felt that unlike the West, infrastructure is not yet in place in India for people to reach office by 7:30 am and perform effectively at pre-market hours.

The move would benefit not just the exchanges and brokers to garner more volumes but also investors, who can react to the news much ahead of schedule.

Regulatory changes are good but they must not be purely academic. They must actually take feedback and realities on the ground as important parameters, so that the intended regulatory change is a success.

The writer is director, My Financial Advisor