SEBI versus IRDA: What went wrong?

On April 21, the Reserve Bank of India (RBI) asked all private banks to take its approval before going in for a QIP (Qualified Institutional Placement). If one goes by the recent regulatory war between IRDA and SEBI, the market regulator should have jumped in and said: "QIP is my domain, I regulate them, stay away from it!" Far from it. And that's because jurisdictions are both activity and entity specific. In this case, SEBI regulates the activity ie: QIP, and RBI regulates the entity ie: Banks.

There are multiple such examples of an overlap of entities and activities, prompting dual or multiple regulatory supervision. So what really prompted the rather public spat between two key financial sector regulators? Was SEBI's order hasty? Was the best way to sort it out across the table? Were attempts made to resolve the issue? Should the Government have sorted the issue out rather than refer it to the courts?

The issue is not new. It has been simmering. SEBI has been raising this issue with the Government and at the HLCC (High-Level Coordination Committee) for over a year. But perhaps things came to a head when last August, SEBI banned entry loads on mutual funds ie: an investor now decided how much he wanted to pay the agent depending on the quality of advice and the value added. One big myth is commissions have been banned. They have not. Only now you get to know and decide how much to pay, and its not embedded in the product as some charge.

As CNBC TV18's investigations have revealed, banks and distributors jumped towards ULIPs (Unit-linked Insurance Policies). Rampant mis-selling followed. Mutual funds were a dirty word for distributors including leading banks. Why? Because the embedded commission had gone, but continued to come in thick and fast when they sold a ULIP.

A few months before August, the Government had set up a committee (which included all regulators) under then PFRDA chairman D Swarup to look at distribution related reforms as well as financial literacy. The committee recommended entry loads be banned in a phased manner even with regard to ULIPs. IRDA cried foul. Protested. Finally gave a dissent note. Why? Because it felt without commissions the insurance industry would collapse. Swarup meanwhile retired, and the committee report was relegated to history.

SEBI then took the issue to the High Level Committee on Capital Markets (HLCC), headed by the RBI Governor. Discussions happened but there was no breakthrough. There couldn't have been, because HLCC is not a regulatory authority, its merely a discussion forum between regulators.