Can India’s proposed P2P regulation take a page out of the Insurance rulebook?

Written by Ketan Warikoo || June 20 2016

India’s insurance sector is worth $60 billion and has established some solid regulatory models that helped spawn an entire web and mobile driven industry. The main insurance regulator, the Insurance Regulatory and Development Authority (IRDA), played a proactive role by setting boundaries early on in the sector, such as clearly distinguishing between insurance brokers and web aggregators.

As early as 2012, the IRDA asked insurance web aggregators to seek a license to operate, and laid down several rules for such websites:

  • Can't display ratings or rankings of insurance products
  • Barred from showing advertisements of any kind, including sponsored products
  • Limits on lead transmission (a customer’s data may not be shared with more than 3-5 companies)
  • Ceiling on fees paid to insurance companies for listing of their products
  • Capping of lead generation remuneration and sale commissions 
  • Must maintain net worth of Rs 10 lakh ($15,000)

Some of the rules were quite restrictive for those in the aggregations business, such as not allowing cross promotion of websites, e.g. a car insurance aggregator can’t display ads from a motoring forum or even best selling insurance products for certain cars. Interestingly there are websites that offer insurance as a part of other financial services. Such websites show ratings and endorsements for all other products except insurance. Therefore, amongst financial services the insurance sector has been beset with tighter norms, especially when it comes to marketing and sales.

However, such stringency in rules helped avoid malpractices in insurance sales and ensured only serious players entered the industry. Some of these rules were relaxed this year even as aggregation platforms started rerouting remuneration to subsidiaries to avoid low fee ceilings and other limits. Today websites such bankbazaar and policybazaar are highly trusted names in the insurance sector and such web aggregators generate more than 90 percent of online insurance sales.

Adopting some of these rules for P2P would help develop the sector better than RBI’s (Reserve Bank of India, India’s banking regulator which came out with a consultation paper on P2P lending) proposed stipulations for P2P lending, such as: maintaining a leverage ratio, brick & mortar store and minimum Rs 2 crore capital ($300,000). Surprisingly these proposed norms look at P2P players as banks rather than technology enabled lending platforms, which are essentially investor and lendee aggregators.

The RBI would do well to distinguish P2P aggregators from direct lending platforms and lay separate guidelines for the two using best practices from other regulators. For example, while IRDA’s guidelines lay out clear penalties for fraud and violation of procedures by aggregators, such norms were not seen in RBI’s consultation paper on P2P lending. It is high time the RBI took a close look at its cousin’s approach, even if it was a heavy handed one! For this heavy handed approach is better than one that mistakes trees for a forest and P2P platforms for banks.