Distribution of Financial Products - Push vs Pull

Posted by: Uma Shashikant on Mon, Sep 6th, 2010

Even as we continue to debate the lack of incentives for selling mutual funds and the mis-selling nightmares in insurance products, the space I was watching was the National Pension Scheme (NPS).  Here was the product that was perfectly designed, after years of research and filled with the good intention of taking pension products to the population that needed it most. The product was a good one, offered choices, was available at low costs and should have taken off, if the belief, especially among regulators, that a good product would sell from “pull” rather than “push.”

 

 But NPS has not taken off as it should have, attracting very few subscribers and managing a much smaller than expected corpus. (The PFRDA website does not seem to feature statistics; Numbers reported in the press vary).  However, while setting up the G. N. Bajpai Committee to review the implementation of the NPS, PFRDA in its terms of reference admits as much - “The National Pension System (NPS) has not proved to be as popular as was envisaged under the original vision and architecture, especially in the non-mandated, non-Government/unorganized segment.

 

Last week, an ADB-IIEF roundtable was held in Delhi, to discuss the findings and recommendations of another report on national implementation strategy for NPS. Among other things, it points to the need for incentives to sell the scheme and for marketing strategies, including a literacy campaign, to create the “pull” for the scheme. It also mentions ‘social-protection floors’ and ‘level playing field on tax treatment.’ While we await the final report, as well as the recommendation of the Bajpai Committee, here is my two-bit on financial product distribution and the push vs pull debate:

  1. The key concern of policy and regulation should be about mis-selling of products and not about the product structure, distribution, incentives or marketing strategies. Regulation should adopt a strict gate-keeping policy that allows only those who are qualified to sell, are willing to adhere to a code of ethics and will accept penalties for mis-selling.  The problem we have here is that intermediaries sell all financial products, but there are three regulators (Sebi, Irda, Pfrda) with limited and poor gate-keeping policies.  This is an area crying for co-ordination among regulators for creation of a common framework for regulating the conduct of sellers and distributors of financial products. 
  2. If one takes the benevolent approach that  products should not be ‘sold’ but ‘bought’ by investors, as has been assumed by both Pfrda and Sebi, at this time, assuming that literacy campaigns and industry-level advertising will solve the issue, is a simplistic approach. Getting the investors to choose financial products that are actually beneficial to them is not about placing the choices in front of them and asking them to choose by themselves, or asking them to pay advisors who help them choose.  Much of the debate in the last one year of implementation of the no-load regime in the mutual fund industry has focused on the loss of assets in the industry.  The moot point is whether the regulatory change resulted in more investors choosing from the well-established and top-performing funds, on their own. There is no evidence on the ground to show that investors are actually making the “good choice” for themselves. The regulatory concern should therefore be: How to reach useful financial products to investors through a responsible “push” strategy, rather than assuming that “pull” is desirable and would work.  We may see wasted marketing and publicity effort. The omnipresent IRDA campaign asking investors to call to register a complaint is a case in point. At a huge cost, the campaign is not helping product choice or education, but only the comfort that the regulator would do what it is anyway expected to do.
  3. That brings me to the question of “pull” strategies that have actually worked.  Two features instantly bring investor interest to the table - one, assured level of return, however small it is; two a tax-incentive that enables an investor to pay less tax on account of buying the product.  A product that features even either one of the conditions works, but investors place a higher emphasis on assured (or perceived assurance) returns over tax saving (notice the pull of taxable bank deposits, over tax-exempt ELSS products).

My sense is that pulling off the plug on incentives to sell mutual funds, has ended the producer-distributor nexus but has not done much to the investor's choice of the product, since regulation has not addressed the core issue of regulating the quality of advisors and penalties for mis-selling.  I digress, but more on this later. But the point I like to make is that we still do not have evidence that the changes to regulation for mutual fund distribution practices has resulted in creating a pull for the products from investors, not in the one year since the change.

 

The direction that PFRDA seems to be moving is to bring in return assurances of some kind and tax-breaks.  It may also bring in some incentives for distributors. If this happened, I would worry about the assurance-cum-tax break based  “pull” for financial products becoming  a costly solution (think growing liabilities for the government), distorting product design and skewing investor preferences.  It is important that incentives to push the products remain, in a regulated regime that penalizes mis-selling.  That is the regulatory imperative.

 Posted by Tensing Rodrigues on Tue, Sep 7th, 2010 3:14:10 pm

I fully agree with Uma. NPS is a good case to learn what works and what does not. Mis-selling by distributors has been been hyped about so much that the investor has been forgotten. The wrong moves from the regulators has driven out sincere distributors and brought in mercenaries. The ultimate loser has been the investor - ironically all this has been done in the name of the investor !
 Posted by Manoj Nagpal on Mon, Sep 6th, 2010 1:22:56 pm

Hi Uma, Your perspective, as always, points to the core of the issue. The media on the other hand has been blaming SEBI rather than understanding and highlighting these issues. Some data of the NPS is below http://bit.ly/NPSSubs http://bit.ly/POPNPS Regards, Manoj

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