Isn’t consumer protection the primary role of regulators’?
Debashis Basu | 27 February 2014

According to a media report, the outgoing chairman of the Insurance Regulatory and Development Authority wants Irda to have a new whole-time member representing consumers. Irda originally had five members, one each for life, non-life, investments, actuary and pension. The position of member for pensions is sought to be replaced. Chairman J Hari Narayan wants that position to represent consumers; the finance ministry instead wants a member for “distribution” and has already shortlisted two zonal managers of the Life Insurance Corporation for the post.

Mr Hari Narayan is retiring in a few months. Under him Irda has cut down the commissions of unit-linked insurance plans, making them less lethal. But he has not gone any further than that for consumers. Traditional insurance plans continue to remain opaque and mis-sold, and he has had a strange approach to grievance redress. He asserts that the regulator’s job is not to focus on individual complaints. Irda’s grievance redress system acts like a post office, forwarding complaints to insurance companies, with poor success.

One such complaint involved Reliance Life Insurance’s Mumbai office, which persuaded a retired railway ticket checker to buy Rs 12 lakh worth of life insurance products that he did not need or understand. While this type of mis-selling is common, this particular case allegedly involved forging signatures of applicants and witnesses, a fake PAN for his sister, inaccurate and inconsistent data of his family members and so on. Yet, no action was taken against Reliance Life and the policy holder is still running from pillar to post for redress. Health insurance also remains a mess and celebrity endorsements of life insurance help lure the gullible.

Therefore, Mr Hari Narayan’s stance on the issue of getting a new member to represent consumers is rather intriguing. However, what interests me is not his sudden pro-consumer stance but the reasoning behind it: “Since prima facie the role of Irda is consumer protection, we should have a member, consumer affairs, and to give a new perspective to consumer protection, it would be best if we had someone from outside the insurance industry.”

Really? In my view, this is the first time the head of any of the three regulators – Irda, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) – has publicly declared that the regulator’s role is primarily consumer protection. All these years, the three main regulators and also the fourth new one – the Pension Fund Regulatory and Development Authority – have acted as if consumer protection is a minor issue.

Sebi has no means of listening to consumer issues systematically. It has advisory committees for primary market, secondary market and mutual funds where there are one or two “investor representatives”. I have seen that neither the chairman nor the full-time board members take these committees seriously. Major decisions are taken or reversed independent of what the committee thinks or suggests. Sebi registers some vague investor organisations, but the chairman and members rarely meet them. In a recent meeting with investor representatives, the invitees were asked to sit at the rear rows while the front seats were packed with Sebi officials! Sebi’s late and inadequate response to consumer grievance issues is well known. Despite numerous stories appearing in the media about brokers cheating customers by misusing the power of attorney they were given, this was not addressed for five years. Its new grievance redress system, SCORES, like the earlier one, offers a mechanical, mindless response, as even former Union secretary E A S Sarma found.

The RBI, the oldest, largest and the most powerful among the regulators, ought to be most open to consumers’ voices because of the explosion of consumer banking in India. Many more people are exposed to credit and debit cards, ATMs, etc, compared to mutual funds and stocks. Even insurance products are now sold through banks in large numbers. It is now clear that banks are among the biggest sources of mis-selling. They enjoy the trust of savers and have access to their data. Also, being large impersonal organisations, they can afford to be completely shameless after pushing customers to buy the wrong products, driven by quarterly targets and incentives.

What is the RBI’s attitude to mis-selling by banks and, therefore, to customers’ interests? Here is some indirect evidence: HDFC Life Insurance’s former MD Deepak Satwalekar’s comments as part of the Bancassurance Committee report of 2011: “…the banks are unwilling to assume any responsibility, or risk, of the result of their mis-selling… So, here is a case where the regulator is keen to protect its flock from the liabilities arising from mis-selling, and is quite happy to let the banks take on the role of a corporate agent where there is no liability since the insurer is the principal.” Mr Satwalekar was categorical that “the time has come when Irda must protect the insurance companies, not just from the risk of mis-selling by the banks, but also the financial interests of the insurance companies… I see no compulsion why the RBI should be allowed to be protective of its flock and make Irda bend its regulations”. This rare and angry insight from an insider exposes the role and attitude of the RBI and market players. Of course, in debates like these nowhere will you see the regulator directing that the discussion must be centred on customer interests and not how each regulator should “be protective of its flock” in an aggressive tit-for-tat reaction.

At the fag end of his tenure, Mr Hari Narayan has made a passing comment about Irda’s primary responsibility. He would do us a favour if he tells us whether this should apply to all regulators. We may start to formulate regulations that are truly in everybody’s interests.