RBI hurdle for insurance broking

Central Bank Does Not Want Additional Risks For Lenders

Mumbai: Banks may not immediately get to sell products of multipleinsurance companies as the Reserve Bank of India is not very keen on them being exposed to new risks. 
    Unlike a corporate agency where the life insurance company is responsible for missteps by the agent, in a broking model it is the intermediary who takes responsibility for mis-selling. 
    "Banks are corporate agents (Bancassurance) because they voluntarily applied for corporate agency license and got their licences. They cannot unilaterally be 'notified' as brokers now. They have to apply for a broker's license and obtain it," said K K Srinivasan, former member, IRDA, in response to a query on whether banks can start selling products of multiple companies. 
    "There are also some points of law here. Agents representinsurance companies. Their acts and omissions are that of theinsurance companies. Brokers are independent. They legally represent the customer and are liable for wrong professional advice given. Whether the banks will be willing to take on this liability?" he questioned. 
    In a statement on Monday, the finance minister had said that the present Bancassurance model of 'one bank, one insurance company' where the bankacts as an agent of the insurance company would be replaced by a broking model. "It is desirable that banks may act as 'brokers' where the fiduciary responsibility of the bank will be to the policy-holder. IRDA will consider notifying banks as 'brokers'." 
    As insurance broker, the bank may sell the products of more than oneinsurance company. This will provide the intended policy-holder a bouquet of products from which he/she may chose the appropriate product based on his/her needs and will also prevent mis-selling," the statement said. 
    IRDA norms require the broking firm to be a legal entity under its jurisdiction. This means that banks would need to float a subsidiary to acquire a broking licence. According to regulatory sources, RBI does not want banks to float new subsidiaries in the financial sector, particularly ones where the contingent liability would be high. An indication that a broker is exposed to contingent liabilities is the IRDA requirement that all brokers purchase a professional indemnity policy which will compensate for any errors or frauds by employees in selling insurance. Also, foreign shareholding into broking firms is regulated and is capped at 26%. This would mean that foreign banks would not be allowed to get into broking as they would not pass the FDI test.WHO WILL TAKE RESPONSIBILITY? 
äIn the broking model, banks will be responsible for mis-selling, not theinsurance company 
äIRDA norms require the broking firm to be a legal entity, which means banks will have to fl oat a subsidiary to acquire a broking licence 
äRBI does not want banks to fl oat new subsidiaries in the fi nancial sector, particularly ones where the contingent liability would be high