Top 12 things that changed in 2012 in Financial Services | Articles

Change is everywhere. But what is striking about the change in the way money is being managed is that this change is accelerating. Financial regulators like RBI, SEBI, IRDA, PFRDA and NHB are bringing in a lot of changes ?in the field of investing, insurance, mutual funds and financial planning/advisory/ consulting.

However, these changes in how your money is managed better can only be effective if the end users are aware of the regulations/changes and act upon it. Here are the 12 changes that happened in 2012 in the field of investments, mutual funds, financial planning, insurance, etc.

Let us start with prominent changes in Banking brought in by RBI:

1. ?Banking Bill

The Bill, which was passed by Parliament on 19 December, is expected to pave the way for more banks in India, the first time after 2003. The newest banks as of now are Kotak Mahindra Bank Ltd and Yes Bank Ltd. The Reserve Bank of India (RBI) is expected to come up with the banking licence guidelines in January 2013. New banks would bring in more competition, a positive for consumers. Last year, when RBI deregulated the interest rate on savings account, Kotak Mahindra and Yes Bank, took the initiative to increase deposit rates.

2. ?No prepayment fee on floating rate home loan

Banks cannot charge a penalty on prepayment of home loans that are on floating interest rates. This move was to reduce the discrimination of rates offered to existing and new borrowers. It also encourages healthy competition among banks resulting in finer pricing of floating rate home loans. Earlier, banks used to charge 2-4% of the loan outstanding as early repayment charges, which forced customers to stick with existing lenders. However, prepayment penalty continues on fixed rate home loans. Even teaser loan customers, who pay a fixed rate only for a particular number of years, are not free of this penalty.

3. ?Aadhaar as KYC

With all banks now accepting Aadhaar cards as a proof of identity as well as address for opening bank savings accounts, the confusion on the card being used as a know-your-client proof is finally over. However, the card or letter can be used as an address proof only if the address on the Aadhaar letter is the same as the actual residential address that is given for communication and other purposes. So, you won?t need documents such as your Permanent Account Number, driving licence or passport if you have your Aadhaar card in place. This is seen a step in the direction of financial inclusion.

Here are the changes that happened in the stock markets:

4. ?RGESS

The government introduced the idea of Rajiv Gandhi Equity Savings Scheme (RGESS), 2012, to encourage retail participation in the capital market. While the initial idea was to get investors interested in direct equity, eventually a certain category of mutual funds was also included. Under the scheme, new investors with annual income up to Rs.10 lakh can invest up to Rs.50,000 to be eligible for a tax break. The capital markets regulator, Securities and Exchange Board of India (Sebi), has asked stock exchanges and assets management companies to list the eligible stocks, exchange-traded funds and schemes on their website.

5. ?IPO allotment

Non-allotment of shares in popular public issues is a common crib of retail investors. To address the issue, Sebi decided to modify the allotment system in such a way that a large number of retail applicants, subject to availability of shares, will get the minimum bid lot. For example, in an issue that is oversubscribed, the system will first allot the minimum bid lot to all retail investors. However, the new system will not be of use in case the issue is not oversubscribed and in cases where the issue is highly oversubscribed and shares on offer are not sufficient to fulfil even the minimum lot criteria.

6. ?Draft regulations on financial advisors

SEBI is differentiating between advisors and agents. The advisor is supposed to give advice on the basis of the needs of their customers and give product recommendations only. The agents are the ones who will actually distribute the financial products for a commission. Though the regulations are in the draft stage, it is important to be able to differentiate between a fee based advisor and a commission based agent.

7. ?High cost

Mutual funds (MFs) can now charge higher expenses if they go in the tier 3/4 towns. According to Sebi, if an MF gets at least 30% gross new inflows in the scheme or at least 15% of its assets from ?beyond top 15 cities?, whichever is higher, the fund house will be allowed to charge an additional 30 basis points to the total expense ratio. MFs will be allowed to charge another 20 basis points as exit load charges since exit load collections from investors will now be directly credited to schemes. Most fund houses have already hiked charges.

8. ?Another KYC

Effective 30 November 2012, the new know-your-customer (KYC) norms came into effect. If you had done your KYC by 2011, you will now need to do an in-person verification (IPV). Simply put, your distributor or fund house?whoever does your KYC?will need to physically verify your identity and that you are alive. If you do not do your IPV, you won?t be allowed to invest in any fund house afresh. In other words, until you get your IPV done, you will not be allowed to invest in fund houses other than those in which you are already invested in.

9. ?Draft direct plan for mutual funds

All Mutual Fund AMCs are expected to bring out a "Direct Plan" version of their schemes from January 1, 2013. This direct plan will have a lower expense ratio as there is no payout for the advisor/agent as it is being bought by the customers directly. More details are yet to come.

10. ?Insurance Product reforms

2012 saw deliberations on product design of insurance policies, especially traditional insurance-cum-investment plans that are opaque in terms of costs structure. In its draft guidelines, the Insurance Regulatory and Development Authority (Irda) has proposed that traditional plans with unbundled cost structure will have to conform to costs caps the way unit-linked insurance plans (Ulips) do. The finance bill 2012 increased the sum assured to 10 times the annual premiums (the earlier limit was five times) for the policies to enjoy tax benefits on contributions under section 80C and on maturity under section 10(10D) of the Income-tax Act. In order to fast-track product clearance, the industry is also working on standard products that do not have in-built riders or explicit guarantees or innovative features.

11. ?Bank as insurance brokers

After the finance minister suggested that banks wanting to sell policies of multiple insurers should consider becoming insurance brokers, the draft on bancassurance formulated in November 2011 was modified to include the suggestion. According to the latest draft, banks have three options: to continue tying up with one insurer across the country; have limited tie-ups across states; or to become an insurance broker.

12. ?Draft rules on health insurance

The draft guidelines on health insurance policies propose that all health policies should be renewable for lifetime. The draft also states that once the pricing is approved, the premium shouldn?t be changed for at least a year and after that not without proper justification. The guidelines also ask insurers to provide a premium table (showing stages of loading) so that the policyholder gets an idea about the likely increase in premium at the time of buying the policy. The draft also proposes an outer limit of 30 days to settle health insurance claims.

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