The Committee on Investor Awareness and Protection is considering a suggestion to offer both commission and fee option during the transition phase towards the proposed no-load structure for the insurance sector.

The committee in its consultation paper on ‘Minimum Common Standards for Financial Advisers and Financial Education’ issued recently has proposed that commission for insurance agents should be brought down to zero in a phased manner by April 2011. “There are demands that during the transition period, both structures (commission and fee) should be in existence and that the choice should be left to the consumers,” D Swarup, committee chairman, said.

Addressing a press conference, Swarup said the panel would take into consideration the suggestion while coming out with its final report. “There are success stories on both structures across the globe. A fine balance has to struck,” he said.

Swarup said the final report of the panel will be submitted to the government by the end of September.

The panel, in its consultation paper, had suggested that all retail financial products should have a no-load structure by April 2011. The pension product in the new pension scheme (NPS) is already no-load. Mutual funds have become no-load with effect from August 1. “Insurance policies need to remove the bias towards selling the policy with the highest commission. Because there are almost three million small agents who will have to adjust to a new way of earning money, it is suggested that immediately, the upfront commissions embedded in the premium paid be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011. The interim period should be used by insurance companies to help their agents make the transition to a more mature way of selling and advising,” the panel had suggested.

Swarup said the eventual decision on whether the insurance industry needs to move towards a no-load structure would have to be taken by the Insurance Regulatory and Development Authority (Irda). “Our recommendations will be considered by the government. After that, it would be Irda that will take the final call on the no-commission structure for insurance. The committee’s word will not be binding,” he said.

He said if and when the no-commission structure comes into play, the fee to be charged by the financial adviser would be left up to market forces. “When the fee structure comes into operation, it will not be mandated by the regulator. It will be a bilateral agreement with consumer and the service provider,” he said.

When contacted by Financial Chronicle, S B Mathur, secretary general of Life Insurance Council, an industry body of life insurers, said insurance should not be clubbed with other financial products. "Insurance products should not be compared with any other financial product such as mutual funds. Unlike, mutual funds, insurance agents sell policies in rural areas too. All this takes effort. Life insurance agents need commission as an incentive to sell," Mathur said.