“Insurance policies need to remove the bias towards selling the policy with the highest commission,” the committee headed by Pension Fund Regulatory and Development Authority Chairman D Swarup said in the draft report released some time back.
The abolition of entry loads on mutual funds is proposed to be expanded to cover distribution of all financial products. The D Swarup Committee on Investor Awareness and Protection, in its consultation paper has made far reaching and comprehensive recommendations on this subject including a proactive approach to creating investor awareness. The paper is currently being discussed and reviewed amongst interest groups.
The recommendations have twin objectives – setting up a regulatory system with common standards for financial advisors and integrated approach to financial education.
Recommendations:
No-load structure – all retail financial products should go “no-load” by April 2011. This will remove the bias of selling products with the highest commission
Financial education for advisors and investors – The proposal to set up the Financial Well-Being Board of India (FINWEB) is an approach to convert awareness into knowledge.
Entry barrier – a common minimum entry barrier for all financial advisors which will include a knowledge-linked training programme and a common examination pattern. In addition, there would be different licenses based on the skill sets of the advisor and the type of products and services he can sell
Code of Conduct - to establish a standard code of ethics across all products and organisations, to ensure that all advisors are registered with FINWEB and to set up a body with the power to admit, discipline and demit members
Disclosure norms – investors should be informed about the total cost borne by them, the income earned by advisors from the sale and maintenance of a product, the risk carried by the product and the role of the product and its outcome
Reporting norms - to include documentation of sale proceeds and a declaration counter-signed by the investor acknowledging the disclosures made by the advisor. This will avoid the practise of hit-and-run financial products wherein an advisor hits an investor with a product and runs
Punitive actions for advisors – penalties, loss of license to do business or criminal proceedings in case of mis-conduct / mis-selling
Dispute Redressing - investors will have a common interface to complain about financial products, services and outcomes
These recommendations can have far reaching effect of increasing investors knowledge of financial products and ensure that the products are sold keeping only investors’ interest in mind, without being influenced by commissions earned by distributors.
The bigger question is whether these recommendation will be approved. The 3 million strong financial advisors community would like to block any such move by the Government. One CEO has already started complaining.
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Nice article, thanks for sharing, maybe to be more precise about the main idea, Keep it up