IRDA, SEBI and RBI are singing the same tune - for once !

The insurance regulator has told insurers to disclose explicitly the commission in the `benefit illustration', a document that contains the benefits due to a policyholder upon maturity of an insurance policy. A signed copy of the illustration along with the proposal form is mandatory for issuing a policy. In a circular to all life companies, the Insurance Regulatory and Development Authority (Irda) said companies will have to disclose the commission paid to agents with effect from July 1, 2010. The regulator said this will bring about enhanced transparency by providing prospective policyholders the exact amount of commission/brokerage paid by insurers.

With this, IRDA has in fact gone a step ahead of SEBI and RBI in its disclosure and transparency requirements. By insisting that the commission disclosure take place in the "benefit illustration" which has to be mandatorily signed off by the customer, IRDA is trying to ensure that the customer is made aware of the costs of the policy as well as the commission earned by the agent - in as explicit a manner as possible.

SEBI had earlier mandated disclosure of commissions earned by distributors - and had asked all distributors to spell out how much commission they were earning not only on the particular product that was being sold, but also a comparison of commissions that they could earn on all comparable products. This would enable the investor to guage whether the sale was possibly being influenced by higher commissions. Not satisfied with compliance of this regulation, SEBI again reminded AMCs to ensure that their distributors were indeed complying with this regulation.

A few months ago, RBI had come out with a guideline for banks selling insurance products to ensure that they fully disclose commissions earned on these insurance products to their customers.

Compliance of SEBI and RBI guidelines still not where they want it to be

While most banks take clients through the benefits illustration and the policy costs, few actually disclose the commissions earned by them. The new IRDA guideline will now compel them to add a disclosure of commissions in the benefits illustration.

When it comes to mutual fund commissions though, there are still a number of grey areas. Some distributors who have their own websites have put up their commission rate cards on their sites. Interested customers can browse through these websites and get the necessary information on commissions. Many haven't done this as yet. The vast majority of distributors do not have their own websites - and are not explicitly disclosing upfront and trail commissions each time they sell a mutual fund to an investor. Many distributors had initially asked for AMFI to come out with a uniform disclosure format - which can be followed by all. To our knowledge, there was no uniform format prepared and shared with all distributors. The fact is that this whole issue was pushed into the back burner.

SEBI - on its part - had laid the onus on AMCs to ensure that their distributors comply with these guidelines. Again, to our knowledge, nothing much has moved here as well. The fact is that this whole issue was pushed into the back burner - with so many other issues coming to the forefront.

What next ?

Now that IRDA has joined the chorus on disclosure - with a very clear implementation guideline - you can expect SEBI to act swiftly with a new set of directives that will be designed to ensure strict compliance with its disclosure regulations. The fact that compliance on this one has been tardy - is clearly not lost on SEBI.

Distributors will need to embrace this change as well - there is no running away from it ! There is little point in arguing about why you should disclose and that no other distributor of any other goods or services discloses commissions. Those arguments are in the past. Regulations have been created. All three regulators - SEBI, RBI and IRDA are now completely aligned on this one. Its best that the distribution fraternity acts speedily to ensure compliance with the disclosure and transparency norms that all financial regulators in India are very keen on enforcing.

It may be a good idea - for starters - for AMFI to quickly come up with a uniform disclosure format - which can then be implemented by all ARN holders. The time to act is now - the industry is perhaps already in violation of a regulation that is quite close to the regulator's heart !

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