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:
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
Post a Comment