Mis-selling is rampant in the financial services industry. While legislation may act as a shield in protecting the interests of investors, an investor can take care of the following aspects to minimize instances of mis-selling
I have come across many cases of mis-selling in the financial services industry but the Mangelal Sharma case came a shocker for me (Will this 79-year old’s protest move the government and the RBI to stop mis-selling by banks?, Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory). This was a case in which even an old man was not spared. Banks and financial institutions claim that customers are king for them but in practice they rarely follow this. Why do we have so many cases of mis-selling of financial products? Is mis-selling happening because there is dearth of legislations? The answer to this question is both yes and no. Though there are legislations in place to prevent mis-selling, these legislations hardly help investors. Also investors in many cases are not aware about how to take benefit of existing laws when they have become victim of wrong financial products sold to them.
Whatever is the reason, there are instances of mis-selling in which people lose their hard-earned money and repent thereafter. While legislation may act as a shield in protecting interest of investors, is there any alternate way in which an investor can prevent himself/herself from becoming victim of mis-selling? Though there is no magic wand to help an investor, s/he can take care of following aspects to minimize instances of mis-selling:
Never buy a product aggressively pitched by agents: It is very obvious that an agent or a representative of financial service provider pitches a product based on the commission or fee that he earns. So it is better not to get carried away by what he suggests. You need to understand your investment requirements and select product based on that. One more important point, even if the agent happens to be a family friend, ask him questions. You cannot leave your investments in other’s hand. Products like life insurance are often mis-sold by agents as investment products. Please remember insurance is a product having potential to cover risks.
Never buy a product you do not understand: The golden rule to prevent mis-selling is not to buy a product unless you have understood the product fully. New products keep on hitting the market from time to time. The most recent example was the Rajiv Gandhi Equity Savings Scheme (RGESS). Many investors bought this product because of the fact that this is a good tax saving option, without realizing the risk factors. In past, there have been many instances when Unit Linked Insurance Plans (ULIPs) were sold to investors. The main reason of this mis-selling was lack of understanding of products by investors.
If you are financially illiterate, there are two options. Acquire necessary skills to understand a product or approach a financial advisor. To me the first option looks better. In India, most of the financial products are plain vanilla products which an ordinary investor can understand. The problem with financial advisors is that most of them offer generic suggestions.
Have a check list ready: In order to understand the product, you need to look at facts such as the risk and return aspects of the product. In order to understand product, you can check out some of the details which are as follows:
Keep greed aside: Mis-selling is easy if greed overshadows rational thinking. Many people invest their money in unknown financial products without understanding the product at all, as the greed of handsome return simply overwhelms them. So it is important that you never invest in products which give unbelievable returns.
Never buy financial products when the deadline approaches: If you are in hurry, you will have many worries later on. Never buy a financial product when the deadline approaches, especially the tax saving deadline. Think and plan in advance. Even if you have to buy any such product, buy conventional time-tested product such as PPF, NSC, etc.
Please note that you can mitigate the instances of mis-selling by becoming more vigilant and careful. Take care to ensure that you never buy what you don’t need. Preventive measures against mis-selling need to be inculcated over a period of time.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
Two complaints of high net worth individuals have shown that the bank has possibly flouted rules and taken signatures on blank forms to execute transactions to churn the mutual fund portfolio and earn huge commissions
Over a year back we wrote about how HSBC Bank took Ms Suchitra Krishnamoorthi, a well-known singer and actor, for a ride over a five-year period by promising an extravagant assured return of 24% from mutual funds as well as insurance. (Read: HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns) However, far from delivering such returns HSBC Bank continuously churned her portfolio. In a similar case, another high net worth individual (HNI) based in London, found out abnormal churning of mutual funds in his portfolio that was managed by HSBC bank. Both are HNIs who were made to sign a power of attorney (POA) in favour of HSBC to handle their investments smartly. They believed in the brand name of HSBC. Most importantly they trusted their banker, like they would trust their doctor.
Moneylife has reviewed Ms Krishnamoorthi’s mutual fund transactions and found massive malpractices by HSBC
According to data from mutual fund industry association AMFI, for FY11 and FY12 HSBC earned the highest mutual fund commissions amongst all distributors. In FY11 it earned a commission of Rs118.97 crore and in FY12 it earned a commission of Rs153.98 crore even when the industry was down in the dumps. Another bank just below HSBC in terms of commissions earned is, not surprisingly, HDFC Bank.
The modus operandi for HSBC in both the cases has been a continuous churning by the “portfolio management service” by taking a power of attorney (POA) and used pre-signed blank letter of intents (LOIs) to execute the transactions on behalf of the clients. The London-based NRI mentions that he was asked to sign blank LOIs. On asking the bank to provide copies of the LOIs, he found that certain forms were not signed by him due to a mis-match in signature. He has even provided forensic evidence to prove that he has not signed on certain documents.
In Ms Krishnamoorthi’s case, she says “LOI’s provided by the bank to me clearly show that investments were made without my corresponding signature or mandate to every debit made by them in my account as is the lawful requirement. In fact inspite of my repeated requests they have refused to provide me copies of LOI’s between 2008 and 2010 – the period in which I incurred maximum loses and my portfolio repeatedly reshuffled without my knowledge or consent”.
Ms Krishnamoorthi in her letter to the banking ombudsman mentions that on seeing around Rs3.60 crore being deposited to her account (as a part of a divorce settlement), “HSBC bank approached me with a proposal that they could handle my investments. Since I hold such large balances, for the same they should be appointed as portfolio managers to handle my investments. They even showed me a very rosy picture of investments which they had made for others and assured me that they would get better returns for me.” The officers of HSBC Bank also informed her that “portfolio management is one of the prime businesses of HSBC Bank other than banking” and assured her “a minimum of 24% p.a. return” on her investments. However, following her complaint to the to officials of the bank she said that “HSBC Bank now claims that they have not acted as portfolio managers but merely advised me on the management of my wealth.”
Ms Krishnmoorthi refutes this saying, “This is a false claim as they have clearly performed the duties of portfolio managers as stated by law and as per the power of attorney obtained from me in 2004.” Apart from mis-handling of her investment portfolio, the bank mis-sold her insurance products promising 24% returns, insisting her on taking a loan instead of withdrawing funds without even disclosing that she was entitled for a smart loan.
As we have mentioned several times in the past, scamming bankers (now being called banksters) look to earn for themselves the highest commission no matter that the investment would terrible for the clients. Recently, we reported on the how senior citizen Maganlal Sharma was duped by his bank into purchasing a mutual fund scheme. (Read: Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory) Thanks to Moneylife’s efforts, he got back his money; however, others are not so fortunate. Moneylife Foundation recently wrote to the Reserve Bank of India (RBI) on the mis-selling by banks. (Read: Moneylife Foundation memorandum to RBI on mis-selling by banks) If you have been a victim of mis-selling by banks do mail your complaints to us at email@example.com
But another striking irregularity has emerged as per the findings as brought to our notice by the other investor is that HSBC Bank was merely acting as portfolio managers and in fact may not have any regulatory authorisation. Not surprisingly, the illegal transactions have earned the bank huge commissions. When the London-based HNI sought legal advice into to this matter with two separate law firms, they mentioned that HSBC Bank has not complied with the portfolio management service (PMS) regulations as laid down by the Securities and Exchange Board of India (SEBI). In order to manage funds or even advice clients the bank was required to obtain a portfolio manager’s license from SEBI.
Even though HSBC has taken a POA to indemnify itself, one of the law firms mention that the bank is still not authorised to provide such portfolio management or advisory service. Along with this, HSBC Bank has not complied with other regulations according to the law firm.
T+1 settlement appears to be a good idea on paper. However, brokers and small investors are not too happy with it due to lack of infrastructure like banking services
Yesterday, Moneylife published an article T+1 settlement system proposed by SEBI: How will it benefit you? written by Gurpur. However, several of our readers, including brokers and investors have termed the T+1 settlement system as great idea only on paper. The banking system will be a big bottlenck to put T+1 into practice.
“Assuming cheque truncation system (CTS) comes into place and I get the cheque from the client at 6pm, where do I deposit it? Even today, when the client pays on T+1 basis, it is the broker who pays the exchange from his own pocket, because the proceeds are realised only after two days. No tech savvy banks credit the proceeds on the same day. Banks may be tech savvy, people are not. Even today, I write cheques because it is convenient to pay my bills although electronic clearing service (ECS) is available,” said one of the brokers.
Hemant, one of our readers, always get his shares directly from the exchange on pay-out day only. He says, “Even now people are allowed to sell shares, next day of purchase. The only risk is of short delivery, which investors have to bear. As per new system suggested, the buyer will have to pay T-1 (i.e one day before he/she purchases), so that broker has money, to pay-in the market. Hence I feel that, till we rectify the problems of banking system no point in advocating T+1 in the market.”
Another issue with the T+1 settlement is the transfer of shares from client’s demat account to brokers account in a short span. The trading closes at 3.30 pm. The process, however, gets over only by 5pm. This means only those who have given a power of attorney (PoA) for debiting shares can survive in this system. In short, small brokers who cannot provide depository participant (DP) services have to shut shop or tie up with clearing members for opening demat accounts to facilitate PoA system, the use and abuse of which is well known. Further the brokers cannot insist on a client to give a PoA or open a demat account where he wants.
Arun Adalja, another reader, feels the T+1 system is good but difficult in practice and may create problems for small investors who do not have internet facility readily available. “In such case (unavailability of internet) one has to carry the signed delivery instruction and his cheque book while visiting the DP. The visits to DP would also increase.”
There is already an option to pre-pay in case of heavy selling by a single client so that margin is released earlier. Brokers can always pay their clients a day earlier in case there is such requirement, provided the shares come into his account.
While the regulator wants to introduce T+1 system, brokers and investors, especially small investors seems to be reluctant to adopt it due to practical difficulties. But, of course, when has the regulator engaged with actual users of system. Retail participation in the stock market is decreasing day by day because of poor regulation and cumbersome rules. The T+1 concept is another step in that direction.