Investment products should have no upfront commissions: Panel

A government appointed panel has suggested complete phase out of upfront commissions on investment products like insurance, mutual funds and pensions.
"The spirit behind the recommendations is the idea that customers must be treated fairly," said the report of the nine - member Committee headed by former Finance Secretary Sumit Bose.
The report, which has been put on the website of Finance Ministry, said a recurring complaint about the three investment products -- insurance, mutual funds and pensions -- has been their inability to increase their reach to Indian households.
"Related to this has been that the sale of these products is fraught with mis-selling," it said.

Consumer interests, it said, will be served by more transparent disclosures that enable consumers to understand products, compare them, and consequently choose those that serve their interests.
"Upfront commissions in investment products and investment portion of bundled products skew seller behaviour and cause mis-selling and churning. These should be phased out completely," the report recommended.

However, upfront commissions for pure mortality should continue since selling pure life cover is relatively difficult.
Retail financial products must have product structures that allow costs and benefits to be easily understood by a retail investor.
"Costs for similar functions across product categories should be the same. There are three basic functions that a financial product serves - protection, investment and annuity," it said.

In all products, including closed-end and open ended products, other than pension products, the choice of withdrawal should remain with the investor.
The regulator should determine a surrender cost that the investor may bear in such products, the report suggested.
"The cost of surrender should be reasonable. The remaining money should belong to the exiting investors," it said.
On disclosures, the panel suggested that product disclosure should be such that a customer can very clearly understand what it costs and what the benefits are.
"Returns should be disclosed as a function of investment and should disclose the e Internal Rate of Return (IRR) of the product.

"Returns should not be pegged to a third number. For example, returns should not be shown as a percentage of sum assured. NAV should reflect the value of investment which would allow the consumers to take the point to point NAV and arrive at net investment returns," the panel recommended.