By Tensing Rodrigues
I have been reading these days a lot about SEBI order banning sales of ULIPs by some insurance companies. Does that not go to prove that there is a lot hanky panky in ULIPs? Ramesh Desai. [Continued from yesterday]

We said last time that it would be nice to believe that SEBI was compelled to ban the ULIPs in a hurry by the spate of dubious “highest NAV” schemes that have flooded the market in recent times. But the facts seem to point in a different direction. And that is where we are going to look today; and then turn around to say what we feel would be the right thing to do under present circumstances.
This morning I was talking to my friend from one of the life insurers who have been prohibited by SEBI from selling ULIPs. He feels this is just a ploy by the securities regulator to make some quick bucks by way of registration fees from insurance companies. Whatever my differences with SEBI, I would not accept that as a motive.
The differences between SEBI and IRDA, and the bitterness that has resulted from it is much older than the order. SEBI is obsessed with one idea: doing away with entry loads and agents’ commissions. I shall not go into the merits or demerits of this idea here; may be some day we will return to it, as this debate is likely to come to the centre-stage in next few months, given that Pranabda has spoken his mind. Right now let us only probe the genesis of conflict between the two regulators.
SEBI enforced the “no load, no commission” regime in mutual funds some months back. At that time it had suggested to and coaxed IRDA to do the same. But IRDA has consistently refused to toe the line. That has angered SEBI. To add to its woes, retail sales of MFs are in doldrums; SEBI knows very well that its strategy has backfired. In such a situation if insurance goes no load, it would greatly help, as then the incentive for selling ULIPs in place of MFs would disappear.  Since IRDA refuses to do that, the alternative would be to bring ULIPs under its domain and make them no load.
I do not know what the end of the story is going to be; given the rancour with which the salvos are being fired, looks like the battle is going to be bloody. The sad part is that, irrespective of who wins the war, the innocent “customer” whom both the regulators vow to protect, will be the loser.
He need not be; the customer need not be the loser if the two regulators keep aside their egos and the government accepts it responsibility. Pranabda cannot just wash his hands off. As the final arbitrator over the financial domain, the Finance Minister has to pronounce his judgement on what ought to be and what not to be. Or he should appoint a panel of persons with domain knowledge (not an inquiry commission to find the wrongs done) to advise on what would be the right policy framework for regulation of financial products that span two or more subcategories. Ideally there should have been a single super regulator for the entire financial sector. As financial products become more and more complex, they are likely to draw from more than one functional area more frequently; and this is going to give rise to similar conflicts more often. A single super regulator cannot be postponed indefinitely.
Whether SEBI regulates the ULIPs or IRDA is irrelevant. What is important is what an ULIP should be and what it should not be, with the customer’s interests in mind. My personal view is that ULIP as a financial product is a purely insurance entity, not an investment entity. Therefore, it should remain exclusively under the regulatory control of IRDA. And IRDA should ensure that it always remains an insurance entity, in concept, design, description and function. But, operation of ULIPs calls for a fund management function. This is a secondary function, incidental to insurance. Since IRDA, by definition, does not primarily hold competency in this function, this specific function should be regulated by SEBI. For instance, guaranteeing highest NAV does not fall in the domain of insurance; it is purely in the domain of fund management, and therefore should come within the purview of SEBI. The subtle separation may be difficult; inter-regulator coordination may be even more difficult. But, just because the coordination between the surgeon and anesthetist is difficult, the roles cannot be merged; worse still the two cannot fight at the operation table; worst still, they cannot wait for the court to arbitrate. Think of the patient! Please send your comments and queries to : <investment.ideas.shop@gmail.com>