The battle aside, there could be some positive fallouts of this controversy

It is not just that the headline sounds like the title of a new Bollywood film; the action on the ground probably lives up to it! But more seriously, so much has been written and spoken on this topic in the last week that one wonders if there is anything left to write about. But as one distinguished panellist commented on a TV programme - "This controversy is to be welcomed since it raises certain basic issues which need to be debated and finalised, no matter what the outcome of the court battle is."

I would hesitate to call this a "welcome controversy". To me, it is a needless controversy that should have been settled outside the public gaze. It affects millions of people who do not understand the issues involved and panic unnecessarily about the safety of their money - which is not an issue at all - or worse, may loose faith in the instrument itself. But it is not that there are no positive fallouts of this controversy. These are:

The media coverage leads to improved financial literacy. We have seen this before. The 'no entry load' for mutual funds rule, implemented by Sebi in August 2009 amid much controversy, contributed to the increase in financial literacy of investors. For the first time, a lot of mutual fund investors realised the kind of cost they were paying for buying mutual funds and I suspect even if the rule had been reversed later, it would still have led to a decline in upfront costs as customers had become more informed. Similarly, no matter who wins the current battle, increased consumer understanding about the costs involved in a Ulip is a given, and this itself will also drive positive changes in the product.

It is inevitable that the transparency and costs norms are bound to improve significantly irrespective of what happens in the court battle. This may induce insurance companies to turn their attention to risk products and come out with innovative products that the market needs. An example is income protection plans. Currently, life insurance plans primarily covers the risk of dying too early. The risk of staying alive but not being able to continue earning income (due to critical illness or loss of job) is provided in a rather limited fashion either through riders or a few standalone critical illness policies, these too provided by just a couple of life insurers. Even the amounts allowed to be covered under such riders/ standalone policies are rather small and cannot provide sufficient cover for middle-class salary earners. Hopefully, there will be more work in designing and marketing such products in the future.

Again there are several views about how this controversy can be settled. I heard a rather interesting take from a close friend. He said the differential costs between Ulips and MFs have anyway been minimised if the Ulip is held for at least 10 years or more. This is due to the welcome move by Irda last year to cap expenses on Ulips. The only issue is mis-selling, wherein customers are encouraged to treat the Ulip as a short-term product to which they can stop contributing after 3 years. If the customer follows this advice, the costs are far higher than those mandated by Irda regulation (3% for Ulips up to 10 years and 2.25% for Ulips longer than 10 years). The extent of mis-selling on this count can be judged by the fact that close to 73 lakh Ulips lapsed in 2008-09. One way to curb mis-selling could be to increase the lock-in period to 10 years and the minimum contribution period to 5 years.

The spat raises the issue of differential norms on transparency and cost structures of similar investment products from two different set of providers. Clearly, mutual funds score higher on both transparency and cost structure norms as compared to Ulips. But existing and prospective investors in Ulips need not panic as the primary mandate of both the regulators is to protect the interests of the policyholders/ investors. So it is unlikely that anything will be allowed to happen that will harm existing policyholders in any way. Meanwhile let's hope the issue is resolved expeditiously.

Source :http://digital.dnaindia.com/