Financial inclusion is a buzzword these days.

To look into the various facets of household finance across India and formulate better policies for the financial services industry, the RBI had appointed a Committee under the chairmanship of Dr Tarun Ramadora—Professor of Financial Economics, Imperial College London. This was done in accordance with the discussions held in the Sub-committee of the Financial Stability and Development Council (FSDC-SC) in April 2016. The Reserve Bank Of India (RBI) , Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) , and Pension Fund Regulatory and Development Authority (PFRDA) sent representations to the panel.

The report of the committee on Household Finance highlighted the need for the financial services industry to adopt customer centric practices and set the expectation that regulators must facilitate convergence in policies with the aim of introducing uniformity in operations.

The Committee’s observation is that Indian households require customised financial products which take into account their unique economic conditions, longstanding traditions, personal life goals, and the complexity of their financial circumstance.

However, this seems to be impossible unless the simplicity and uniformity across financial service segments rise higher.

In this context, the Committee says, “In the current scenario, Indian households are unable to differentiate between the titles of “Investment Advisor”, “Independent Financial Advisor”, or even “Insurance Advisor”. “We propose that clear nomenclature with uniform rules should apply to all providers of financial advice regardless of their specialisation.”

Furthermore, to improve the national reach of financial services, the Committee proposed the fiduciary model for advice. Within this, the Committee recommended to clearly segregate distribution and advisory businesses —on the similar lines of what SEBI has already proposed.

The Committee notes: “We propose that advice and sales of financial products be separated, supported by a fiduciary standard. We note that this is not the current structure of the finance industry and propose that this transition be phased in. We propose that the first step in this direction is the convergence of advisory activities across products and regulatory jurisdictions. This is to be followed by a rationalisation in fees/commission across financial products such that sellers are indifferent between similarly placed financial products.”

Here are some of the proposals, suggestions, and recommendations from the Committee’s report:

1. Proposed to convert all transactions to the electronic clause by phasing out cash transactions at a predetermined pace.
    
2. Suggested that every investment should carry two tags— a distributor code and an adviser code with uniform nomenclature which is self-explanatory across all financial products.
    
3. Proposed that RBI should immediately (rather than after 3 years) require banks to have a separate entity to sell products.
    
4. Insisted on financial service providers maintaining transparency about compensation structures with individuals receiving financial advice. This includes disclosure of commissions and incentives paid to distributors (both incremental and cumulative) in every statement sent to investors.
    
5. Recommended a follow-through on the RBI’s directive for banks to create subsidiaries for investment advisory services and register these with SEBI (which could be used as a yardstick in this context, the committee clarified).
    
6. Evaluated the promise robo-advice holds, which has the potential to offer both scale and customisation.
    
7. Identified a minimum set of financial products, which in its view, Indian households must hold to draw the benefits of capital markets.
    

In a nutshell, the Committee made keen observations about household finances across India and recommended a simple yet extremely effective course of actions to improve the spread of financial services in India.

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