Regulation of ULIPs, Pension schemes, Money laundering, KYC

More recently, IRDA has taken a holistic view of the features of ULIPs and addressed issues impacting the policyholders including the way such products are sold/bought; how ULIPs can be better financial instruments for providing risk coverage; how sale by unlicensed personnel and several other malpractices existing in this market may be curbed by plugging legal loopholes and tightening of the regulatory ambit; legal mandate to initiate direct penal action against Corporate Agents etc. IRDA therefore initiated exposure drafts covering these areas and received considerable feedback from various stakeholders on the issues put forth. The issues were then presented to and discussed with the members of the Insurance Advisory Committee as well as the members of the Board of the Authority. The following regulatory initiatives have been approved by the Authority during the Board meeting on 31.05.10.

Distribution channel related changes:

1. IRDA has amended the IRDA (Insurance Advertisements and Disclosure) Regulations to remove any scope for the involvement of unlicensed personnel/entities in the sale of insurance products.
2. IRDA has amended the IRDA (Licensing of Corporate Agents) Regulations to further tighten the Code of Conduct of corporate agents to ensure that the prospect does not deal with any unlicensed person. The Regulations have also been amended to ensure that there is no scope for any kind of remuneration other than commission where sale has been effected. This measure will reduce the expenses of the insurer, thereby lowering premiums to be paid by the policyholder.
3. Regulations for referrals: IRDA has also addressed the issue of Referrals by bringing out separate Regulations leaving no scope for misuse of the system. Companies which wish to share their database of customers with insurers would need to get approval from IRDA after having conformed to the requirements as laid down in the Regulations. Further, there are restrictions on the business activities of the referral company to ensure that there is no misuse of the system. For instance, the referral company shall not be in any business of extending loans and advances or accepting deposits etc though there are exceptions such as for Regional Rural Banks, Co-operative banks etc. The Regulations cast obligations on the referral company as well as the insurer including submission of data as and when called for by the Authority.

ULIP Structure Related Changes:

(1)  Lock in period increased to five years:

IRDA has increased the lock-in period for all Unit Linked Products from three years to five years, including top-up premiums, thereby making them long term financial instruments which basically provide risk protection.

 (2) Level Paying Premiums:

Further, all regular premium /limited premium ULIPs shall have uniform/level paying premiums. Any additional payments shall be treated as single premium for the purpose of insurance cover.

(3). Even Distribution of Charges:

Charges on ULIPs are mandated to be evenly distributed during the lock in period, to ensure that high front ending of expenses is eliminated.

(4). Minimum Premium Paying Term of Five Years:

All limited premium unit linked insurance products, other than single premium products shall have premium paying term of at least five years.

(5). Increase in Risk Component:

Further, all unit linked products, other than pension and annuity products shall provide a mortality cover or a health cover thereby increasing the risk cover component in such products.

(i) The minimum mortality cover should be as follows:

(In case of whole life contracts, term (T) shall be taken as 70 minus age at entry)

(ii)The minimum health cover per annum should be as follows:

(6). Minimum Guaranteed Return for Pension Products:

As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.

(7). Rationalisation of Cap on Charges:

With a view to smoothening the cap on charges, the capping been rationalized to ensure that the difference in yield is capped from the 5^th year onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder.

Discontinuance of Charges:

IRDA has also addressed the issue of discontinuance of charges for surrender of ULIPs. The IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations brought out by IRDA in this regard ensure that policyholders do not get overcharged when they wish to discontinue their policies for any emergency cash requirement. The Regulations stipulate that an insurer shall recover only the incurred acquisition costs in the event of discontinuance of policy and that these charges are not excessive.  The discontinuance charges have been capped both as percentage of fund value and premium and also in absolute value. The Regulations also clearly define the Grace Period for different modes of premium payment. Upon discontinuance of a policy, a policyholder shall be entitled to exercise an option of either reviving the policy or completely withdrawing from the policy without any risk cover. Further, the regulations also enable IRDA to order refund of discontinuance charges in case they are found excessive on enquiry.

Pension schemes

PFRDA, as already mentioned, is the pension regulator and works towards its promotion and development. It is a Central autonomous body and is a quasi-government organisation and has executive, legislative and judicial powers similar to other financial sector regulators in India such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and, Insolvency and Bankruptcy Board of India (IBBI). PFRDA administers and regulates the National Pension System (NPS) and also administers Atal Pension Yojana.

Functions of PFRDA

• Regulate NPS and pension schemes to which PFRDA Act applies
• Establish, develop and regulate pension funds
• Protect the interest of pension fund subscribers
• Register and regulate intermediaries
• Approve schemes, terms and conditions, and laying down norms for management of corpus of pension funds
• Establish grievance redressal mechanism for subscribers
• Promote professional organisation connected with the pension system
• Settle disputes among intermediaries and also between intermediaries and subscribers
• Train intermediaries and educate subscribers and the general public with respect to pension, retirement savings and related issues
• Regulate the regulated assets
• Call for information, conduct inquiries, investigation and audit of intermediaries and other entities connected with pension funds

National Pension Scheme

NPS is a defined contribution pension system introduced by PFRDA whereby subscribers’ contributions are collected and accumulated in an individual pension account using various intermediaries. Under NPS, individual contributions are pooled together into a pension fund and is invested as per approved investment guidelines. Funds are generally invested in diversified portfolios consisting of government bonds, bills, corporate debentures, and shares, based on subscribers choice. Subscribers also have an option, at the time of exit, to purchase a life annuity by using accumulated pension fund. As already mentioned,, NPS is governed by PFRDA. PFRDA also established an NPS trust under Indian Trust Act, 1882 in order to manage assets and funds under NPS in the best interest of subscribers. NPS Trust is managed by a Board of Trustees appointed by PFRDA who is the settlor of the trust. Legal ownership of trust and funds is entrusted to the board of trustees. The Board consists of a Chairman and up to 5 members including the chairman, and the Board meets once in 3 calendar months. NPS Trust is responsible for executing individual pension accounts in its name with the subscriber, protecting the properties of NPS, safeguarding interest of NPS and its subscribers, approving various documents and reports including audited financials submitted by various intermediaries of NPS trust, monitoring and evaluating operations of such intermediaries, exit the subscriber from NPS etc.

4. Intermediaries, stakeholders of PFRDA, NPS Trust

PFRDA has appointed various intermediaries for the purpose of collection, management, recordkeeping and distribution of accumulations. Various intermediaries of PFRDA are as follows:

Pension Fund

Pension fund is one of the intermediaries which has been granted a certificate of registration by PFRDA as an authority for receiving contributions, investing them, and paying the subscribers in a specified manner.

Primary functions of the pension fund are as below:

• Collection of subscribers funds (subscribers who have given their choice of investment and subscribers who have chosen auto allocation of funds) from trustee bank for the purpose of investment
• Constitute investment committee and risk management committee
• Maintain proper books of accounts for pension fund schemes
• Declaration of Scheme NAV (Net Asset Value) at the end of each working day and communicating to Central Record Keeping Agency (CRA) for unitization in subscriber’s Permanent Retirement Account Number (PRAN)
• Reporting operational activities to NPS trust at regular intervals

Money laundering

Prevention of Money Laundering Act, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money-laundering and to provide for confiscation of property derived from money-laundering.[1][2] PMLA and the Rules notified there under came into force with effect from July 1, 2005. The Act and Rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information in prescribed form to Financial Intelligence Unit – India (FIU-IND).

The act was amended in the year 2005, 2009 and 2012.

On 24 Nov 2017, In a ruling in favour of citizens’ liberty, the Supreme Court has set aside a clause in the Prevention of Money Laundering Act, which made it virtually impossible for a person convicted to more than three years in jail to get bail if the public prosecutor opposed it. (Section 45 of the PMLA Act, 2002, provides that no person can be granted bail for any offence under the Act unless the public prosecutor, appointed by the government, gets a chance to oppose his bail. And should the public prosecutor choose to oppose bail, the court has to be convinced that the accused was not guilty of the crime and additionally that he/she was not likely to commit any offence while out on bail- a tall order by any count.) (It observed that the provision violates Articles 14 and 21 of the Indian Constitution).

The PMLA seeks to combat money laundering in India and has three main objectives:

• To prevent and control money laundering.
• To confiscate and seize the property obtained from the laundered money; and
• To deal with any other issue connected with money laundering in India.

Attachment: Prohibition of transfer, conversion, disposition or movement of property by an appropriate legal order.

Proceeds of crime: Any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.

Money-laundering: Whosoever directly or indirectly attempts to indulge or assist other person or actually involved in any activity connected with the proceeds of crime and projecting it as untainted property.

Payment System: A system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. It includes the systems enabling credit card, debit card, smart card, money transfer or similar operations.

KYC

This is one of the biggest issues with insurance companies and passing money through the company. Criminals who want to launder money could easily put the dirty money into the claim that they file with the insurance company, and then receive it back through a check when they cash out on the account.

While the vulnerability of having this happen in the insurance industry is not as high as in the financial industry, it is still one of the biggest issues that insurance companies are faced with.

Fake Accounts

There are a number of fake accounts that can happen with insurance. Not only because these accounts are not in an actual person’s name, but it is usually done through a broker or insurance agent, not just through clients who come to the insurance company.

Skimming: The premiums are stolen through the system before the payments are sent to the account.

Lapping: Premiums for the accounts are stolen and then covered up when they are credited to a fake account in the system that shows the premium of another customer.

Fictitious Policies: These policies are made up, do not actually exist and are paid for through the broker’s own money. These can be held with the insurance firm and are generally not looked into closely because they tend to look and act like a normal, regular insurance policy.

Stolen Identities

Identities within the system can be stolen by anyone who has access to the system. This information is protected, which makes it illegal to steal, but it happens. Those who have access to this information, or get into the accounts of the insurance company, have access to social security information, personal and financial information, and any other information that they may need to steal an identity.

False Insurance Claims

False insurance claims happen every day throughout the entire world. Those who claim that something happens to their loved one, to themselves, or to the property that they have insured, but it does not actually happen can collect on the amount that the insurance company might pay out to cover the costs they promised to pay.

This insurance amount varies depending on the amount of insurance you have on the item. However, many insurance companies are now looking into the claims more closely, as this is something that can cause a series of issues in the end.

Application Fraud

Those who put the information on the application to get the insurance coverage but lie on it are committing fraud. It is important that this information is double-checked when signing up for the claims and coverage, as those who are lying may be getting more coverage than they are supposed to be getting.

KYC refers to identity verification procedures used to ensure customers are who they say they are. KYC is also a part of AML regulations framework that is an umbrella term for the entire set of mechanisms deployed to protect against money laundering and financial crime. There are four different components that are used in this process for any company:

• Customer Acceptance Policies
• Customer Identification Procedures
• Monitoring Transactions
• Risk Management

Those who are looking to not only prevent insurance fraud but also streamline the customer onboarding process can look to provide better steps to the KYC processes that they should use within their company.

In the past, the KYC method was an error-prone, lengthy, and time-consuming process. On top of that, it wasn’t scalable at all, which is why it is important to look for an automated approach or solution.