Government of India Volume I: Analysis and Recommendations

ANNEXES
6. The law must provide for licensing of retirement finance entities and retirement
finance funds, but there should be no licensing of individual plans. The regulator
may prescribe conditions to be fulfilled by each plan to be launched by the licensed
fund. In addition to the entity’s licensing, each of the trustees of the entity should
be registered with the regulator.
7. The law should define principles-based criteria for awarding licenses to retirement
financing entities and funds. Licensing should be on the basis of demonstration
by the trustees/promoters that they have the required legal, managerial and ownership
structures, capability (human, technology and financial), risk management
systems, investment policy, financial strength and capital to manage the entity
and/or the fund. The process of awarding the licenses should be transparent, and
the applicants should be given a detailed response in a reasonable amount of time.
The regulator should also have the power to modify or withdraw the licenses after
due process, and such decisions should be appealable in a court of law.
8. The law should provide that the “prudent person standard” be followed for investment
management by those managing the retirement financing funds, such as pension
funds, EPFO, etc. The regulators should also have the powers to impose some
broad portfolio restrictions to prevent excessive risk-taking by the funds. These restrictions
should be imposed only as exceptions, and must not take the form of the
regulators prescribing investment management strategies for the funds.
9. All retirement financing funds must be required to set forth and actively pursue an
overall “investment policy”. The law should empower the regulator to define the
minimum requirements for the policy.
10. The law should empower the regulator to set standards for valuation of retirement
financing assets in a transparent manner, informed by prevailing standards in other
parts of the domestic financial system or in other jurisdictions. The regulator may,
if it so chooses, delegate the task of setting standards to a standard setting body,
but the regulator would continue to be responsible for the standards.
11. For defined contribution schemes with administered interest rates, such as EPF and
PPF, the regulators should have the power to regulate and supervise them for sound
investment management practices.
12. The law must empower the regulator to regulate and supervise the risk management
systems of retirement finance entities and funds, to ensure the adequacy of
risk management systems in place. These powers must cover all the key elements
of risk management systems, and must always be used in a risk-based manner. The
regulations must be principles-based, should focus on supervision rather than exante
rules, and the regulator should not impose any one risk management model
on the entities and funds. For small funds with poor in-house capability, the regulator
may mandate seeking external support in developing sound risk management
practices.
13. The regulators must be given the power to impose risk-based capital and liquidity
requirements on retirement finance funds.
14. The law should give the regulator the power to regulate and supervise all the key
elements of corporate governance of retirement finance entities and funds, in a riskbased
manner.
Consumer Protection
15. The law should provide protection to consumers from being misled or deceived,
subjected to unfair terms of contract, or unduly penalised by the fund. Consumers
should have access to a reasonable mechanism of grievance redressal. Consumers
should also be given the right to get support to take the right decisions, and receive
reasonable quality of service.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 171