Tuesday, September 15, 2009

Regulators should quit reckless backseat driving says Indian Industry

Quit reckless back seat driving was the message to the chairman of India’s Securities and Exchange Board of India (SEBI) by the mutual Fund AMC’s in a meeting last week. the SEBI Chairman has been demading that AMC’s should not pay upfront fee to the distributors from their own expenses. The SEBI Chairman C B Bhave was told that the AMC’s are not into charities and have business considerations.
It is not just the AMC’s, even the share broking community, distributor and common customers are of the same opinion. While the industry is scared of talking in public because of the alleged high handedness of the authorities, the anger and frustration is clearly showing.Similar outburst can be heard from the insurance industry against the Pension Fund Regulatory Development Authority’s (PFRDA) Chairman D Swarup. D Swarup has failed promoting his New pension scheme (NPS) to the retail customers as there are no intermediaries in between. Industry is scoffing at D Swarup for running Pension Scheme under the impression that it is a public distribution scheme (PDS) (India’s ration distribution to poor below the poverty line) and he expects that people apply in hordes. Industry is also pointing out that D Swarup is asking the government subsidies in terms of lower demat charges and other benefit. They say, D Swarup can be running a charity, but, industry is not. Even the PDS system usses intermediearies who are compensated with built in price by the government. The AMC’s chosen to distribute NPS hope that better sense will prevain on PFRDA.
The entire problem, is that these two government servants are basing the success of their drive to cut intermediary commissions, on a failed attempt to cut stock brokers commissions by SEBI. Since the stock broker community now reaches out to the high net worth investors (HNI) and block deals, the people in small villages and towns remain out of the stock investments. This has led to inequitable distribution of wealth between cities and villages. Stock broking community says that the FII’s drive the stock markets and domestic investments can hardly influence the market as there is no sufficient money in their hands. The SEBI initiative is a total failure. Smaller investors complain that SEBI is more interested in HNI’s. SEBI touts it as a success. Based on SEBI’s self declared success, it has taken off the entry loads in mutual fund, which is metting the same fate of the earlier share broker example. It has been just two months of this ill conceived mutual fund move and D Swarup is now using the Mutual Fund example to be employed on the insurance industry. Worse, D Swarup even quotes his own example of NPS scheme, which he claims is a good example. Other than the mandatory and statutory requirements, the retail version of pension scheme is a failure. Financial industry is not supporting the moves, all they are saying is that if the illconcieved idea has been implemeted in mutual funds, then implement it throughout financial sector for party.
The consultation paper titled “Minimum common Standards for Financial Advisors and Financial Education,” floated by D Swarup is also object of ridicule. Industry says that mind is already made up. The report ignores two fundamental facts. It ignores the fact that people do not invest on their own and they have to be persistently persuaded to invest. Instead the report takes a view that a customer asks for an advice on their own. Tell that to a Insurance or financial adviser and he will end up laughing belly up. Then D Swarup scores a self goal in the report saying that “over 70 per cent of investors buying mutual funds relied on the agent at the time of their most recent investment and almost 90 per cent are buying insurance policies from agents.” Industry points out that the investor need not go to a financial adviser, so why can’t they can investment it themselves.
The second premise is that he says the advice is chargeable. Well, this is the fundamental flaw with the SEBI initiatives too. Industry points out that since this report is more a copy and paste of reports from US, UK and Australian, the authors have not used their grey matters. They point out that India lags in major indicators vis a vis people living in advanced countries. These parameters are mainly education, infrastructure, transport etc when it comes to investing. Blindly copying others standards is not desirable. An advice cannot be sold to people who are reluctant to buy anything. It has to be pushed for their own good.
The customers and the distributors are also complaining. Even a willing customer finds it difficult to buy shares. He simply does not has the time and energy to do it. An agent is fine who gives a breadth of services and the fee is built in the product itself. Sonam (35 years), a house wife feels that these regulations are meant for bigger investors. She stays in Dombivli, a small city near Mumbai. She also says that she has never heard of SEBI or PFRDA. She and her husband have heard of the New pension scheme, but, she has no idea where to get information. She says she is well versed with insurance and has necessary policies. She also asks that who in the right mind will stop commissions?
Mr. Kumar (65 yrs) from Andheri says that if he has been cheated by an agent, there have been other agents who have bailed him out. He says that he is more frustrated by the government offices than agents.
Distributors feel that the government is using customer service plank as the smoke screen. They feel that government is pitching agents against their clients.
Even statistically the two government servants from SEBI and PFRDA are at handicap. The very basis that financial services are being miss sold is not provable statistically. Take example of insurance. To quote SB Mathur, Secretary General, Life Insurance Council (from Business standard, September 9) “Rs 14,500 crore as commission in 2008-09 against a premium of over Rs 220,000 crores collected. That makes average commission of 6.6 per cent. Premium-to-commission ratio fell from 12.1 per cent at the time of opening up of the (insurance sector) sector. It is alleged that high commissions drive agents to do lot of mis-selling. The industry has around 30 crore policies in force (this is the highest in the world according to the IRDA annual report) and has accumulated an asset base of Rs 930,000 crore. The report has some numbers on policies lapsing but it does not look at the high growth in renewal premium income. Renewal premium income has increased from Rs 26,250 crore at the time of liberalising the sector to Rs 156,000 crore in 2007-08 and Rs 220,000 crore in 2008-09. The much criticized unit-linked business has jumped from Rs 8,825 crore in 2006-07 to Rs 22,380 crore in 2007-08 and to over Rs 46,000 crore in 2008-09. All this suggests that selective data which supported the preconceived notions of the authors have found place in the report.”
Mr. Mankame (79 yrs) got his US 64 bonds redeemed by an agent free of cost. He converted his US 64 bonts to a UTI MF scheme and has earned a neat 65% profit since January. He says that the agent had explained all options and he himself opted for the equity option. At the same time, the agent received 2.25% commission from the AMC, but, he says that he could have settled for nothing had Mr. Mankame decided not to invest.
Deep’s mother is a recent widow. An agent found her in tears in a bank and took courage to ask her what was her problem. She showed him a file with policies and funds that she does not understand. The agent volunteered to help her, but, she said that she has no money to pay him. Agents said that he wants nothing, she will definitely require it later. The agent says that he already makes money on products and he need not take fees from the widow just for advice and running around.
Mr. Gupte asks who will help him with mediclaim when he is in the hospital? Neither he will be able to move, his wife does not understand, his kids are too small and his relatives don’t have time. He asks “how will I pay fees to an agent when I have been to hospital and not earned salaries. Besides I would have spent a lot of money and I will not get entire money back.” Mr. Gupte is the sole bread earner in the family.
No sensible person in the Industry, distributors and customers have said that betterment is not good. Neither the industry / distributors, nor the client wants change to existing set up except required refinement. Then what is the change the two government servants are talking about? Is the change a smokescreen for failure or there is vested interests?

Monday, September 7, 2009

India's Financial DON

India's Financial DON

With India’s New pension Scheme as a non starter with common man and the Mutual Fund industry falling back to institutional investors, D Swarup panel in the name of alleged financial reforms has recommended scraping agent fees on financial products. D Swaroop needs no introduction, he is the failed Chairman of the Pension Fund Regulatory Development Authority (PFRDA) which runs the New pension Scheme. Meanwhile the other Civil Servant, C B Bhave, chairman of the Securities and Exchange Board of India (SEBI) has removed the entry fee for investors, a move that has nearly killed the retail Mutual Fund sales in India. C B Bhave already holds the dubious distinction of killing retail (for small investor) Share market activity in India.

The politician and present Union Minister of Home Affairs P Chidambaram is busy coding Tax reforms which is not his job. He now wishes to tax all insurance and investments. His last tenure as finance minister, P Chidambaram ensured the fall of otherwise healthy economy which he inherited by from competent financial ministers before his term. Chidambaram spent all his energies taxing the ripe economy. He was found issuing empty threats to Indian Industry, after the world economic problems set in, while sitting in other world capitals and negotiation non financial deals.

The idea of moving to thin capitalization may not be bad. ‘Thin capitalization’ means a situation an entity has a high proportion of debt than equity. The method of achieving thin capitalization by the Indian government is wrong. Thin capitalization actually goes against the very grain of customer empowerment, the platform C B Bhave and D Swarup are using for their advantage. P Chidambaram’s penchant to tax is not understandable if you see his dismal performance as finance minister. He imposed education cess and the money has not been spent in education. Worst example of P Chidambaram’s tax fetish was taxing the ATM withdrawal. It is alleged that P Chidambaram was eased out of Finance ministers post because of his incompetence.

If these bureaucrats keep their ego out, they might see the damage to the New Pension Scheme and Mutual Fund. Instead they are set to destroy the most successful financial advisory model, the insurance. It was the insurance agents who have built up the retail financial industry in India. The mutual funds was also pushed by the insurance agents in majority of the case. Mutual Fund industry failed to cultivate the individual agents and chased the High net Investments and Institutional investments.

Let us take the example of C B Bhave’s stock market reforms. Today a small investor is left out of the stock markets. How does a small investor buy stocks? Since he has small money the big brokers and sub brokers shun him. He is not so capable of using an internet. Even if, he dose not understand the financial ratios. Now, since the Mutual Fund came to C B Bhaves attention, the small investor will be further left out. Misselling should be dealt with necessary regulation tackling that particular problem. But C B bhave has a history of chopping the head for a tooth ache. No head no problems seems to be his motto.

A small investor can be served only by a individual financial adviser. Had NPS been rewarding, D Swaroop would have been scripting success stories than the self face saving committee recommendations he is making. A small investor cannot pay fees as he barely has money to invest and a individual advisor needs higher commission to survive. The current Insurance model was very sustainable. Even now, the cut in the commission of the Development Officers of the LIC has a telling affect.

The premise that agents should negotiate for commissions with customers is an unworkable idea for which India is not ready yet. Finance ministry (or the Home minister), the SEBI and the PFRDA have not taken any initiative to educate the customer. The entire education of customers was done by the insurance agents and is a continuous process. Let us think of a situation where SEBI, PFRDA, Income tax employees and the Home minister should be paid salaries based on the services they render and should be negotiated with their customers, viz, the mutual fund and insurance distributors. And to truly empower the customers of these entities, there should be minus salaries of these employees are found cheating or not working optimally. Should the Home minister should be paid over time for doing finance jobs or not paid for not going behind the terrorists. And should the Finance minister be paid at all?

If there are reforms required it should be in the bureaucracy, tax departments and the the reforms of the regulatory bodies themselves. These entities have allegedly become the hubs of corruption.

Now, let us ask if these above mentioned departments are truly customer centric? Is the Customer empowerment is limited to the agents? Has the customer won or lost? Is the customer being serviced at all? Is the 2% - 35% percent commissions to agents costly to the customers than the corruption and the unrewarding taxation? By forcing the investor to investing in low yield debt and taxing their returns truly an investment empowerment?