Regulations
Lessons from UK about mis-selling of insurance
British banks and financial institutions were asked to shell out £1.3 billion in compensation for mis-selling insurance from Card Protection Plan. What lessons can we learn from this episode?
 
In a first of its kind, the UK regulator had, in November 2012, imposed the largest fine of 10.5 million British pounds (equivalent of over Rs100 crore) on an insurance company called Card Protection Plan Ltd (CPP) of UK for mis-selling insurance products to consumers through banks and other financial institutions since January 2005. 
 
As per the press release dated 22 August 2013, the Financial Conduct Authority (FCA), the UK regulator, it is reported that two insurance products, called ‘Card Protection’, which cost around £30 per year and ‘Identity Protection’, which cost about £80 per year were widely mis-sold by CPP. Customers were given misleading and unclear information about the policies so that they bought the cover. The cover was neither needed nor did it cover risks that had been greatly exaggerated. In addition to selling directly to customers, high street banks and credit card issuers introduced millions of customers to CPP, the insurer; thereby 13 more institutions became parties to this misadventure.
 
The key failings on the part of the insurance company identified were:
 
CPP sold its Card Protection product by emphasising that customers would benefit from up to £100,000 worth of insurance cover. This was not needed because customers were already covered by their banks;
 
CPP overstated the risks and consequences of identity theft during sales of its Identity Protection product.
 
Protection of consumer is paramount in Great Britain:
 
Not satisfied with imposing the aforesaid fine on the insurance company the FCA, in pursuance of its objective to secure an appropriate degree of protection for consumers and to enhance the integrity of the UK financial system, compelled the insurer and all those banks and institutions who had sold the policy to refund the premium charged along with interest at 8% to all the policy holders, who were mis-sold these policies since 14 January, 2005.
 
This agreement arrived last week between the FCA and the following institutions would result in providing redress to seven million customers, who between them bought and renewed about 23 million policies during the last about seven years. The redress bill could be up to £1.3 billion (about Rs13,000 crore) and redress per customer will depend on the type of policy (or policies) owned and the length of time it was held. 
 
Here are the institutions involved in mis-selling insurance:
 
Bank of Scotland Plc (part of Lloyds Banking Group)
Barclays Bank Plc
Canada Square Operations Limited (formerly Egg Banking Plc)
Capital One (Europe) Plc
Clydesdale Bank Plc (part of National Australia Group Europe)
Home Retail Group Insurance Services Limited
HSBC Bank Plc
MBNA Limited
Morgan Stanley Bank International Limited
Nationwide Building Society
Santander UK Plc
The Royal Bank of Scotland Plc
Tesco Personal Finance Plc
The Card Protection Plan Ltd. the insurance company primarily responsible.
 
Source: www.fca.org.uk
 
This is a great victory for the consumer movement in Britain. It is also a great achievement for the regulator, who brought all those banks and institutions to their knees. The FCA forced them to refund entire premium collected for more than seven years, along with interest at 8%, when the prevailing deposit rates are less then 2% presently in UK.
  
What is the role of FCA of UK?
 
The action initiated by the UK regulator is a suo motu step based on their own observations of what was happening in the markets. This is a classic example of how they protect the consumers. In fact, the FCA is established under the UK Financial Services Act, 2012 for not only regulating all the players in the financial services industry but also with the objective of protecting consumers and to champion their cause to ensure that they get a fair deal.
 
The Financial Services Act came into force on 1 April 2013. The Act makes fundamental changes to the way that financial services providers, like banks, are regulated. The Act will protect consumers and supervise all firms to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants.
 
What lessons can we learn from this episode?
 
Unfortunately, In India, we do not have a common regulator for all the financial services as it is in the case in UK. None of our regulators have been able to take stern action for mis-selling of insurance products by banks so far, leaving the consumers to their fate. With the Insurance Regulatory and Development Authority (IRDA) recently giving its nod for banks to become insurance brokers, the whole picture of marketing of insurance will change (it also depends if the Reserve Bank of India (RBI) permits banks to go along with this proposal). But what is important is that before permitting banks to become insurance brokers, RBI should come out with stringent norms for all players in the market and enforce them with an iron hand, with a view to safeguard the interest of all the consumers. It should also protect them not only against mis-selling but also against conning with all types of guarantees and promises, with no intention to honour them.  
 
Mis-selling of insurance is so much imbedded in the industry that even Rajiv Takru, secretary, financial services at the ministry of finance, was himself a victim of this scourge many years back. Here is what he narrated at an event in Mumbai, reproduced from Moneylife, dated 14 August, 2013… 
 
“Mr Takru gave his own example where he was mis-sold by a smooth talking Life Insurance Corporate of India (LIC) agent in 1992. He was told that the premium of Rs3,000 has to be paid for 15 years. In case of unfortunate death, his family will get Rs1 lakh. If not, then he can claim the maturity benefit of Rs1 lakh at the end of 15 years. After diligently paying premium for 15 years, to his shock he found that the maturity benefit will be paid when he turns 80 years. So, he has to wait for another 34 years after premium payment term of 15 years to get his Rs1 lakh. He says that if it can happen to a literate person, then it is surely an issue for illiterate persons.”
 
Today, in India, we do not have a single unified statutory authority that can protect and champion the cause of the consumers on the lines of the FCA in UK. This has resulted in making the consumer a pauper (not a proverbial King) and silently suffering like an orphan left to fend for him or herself. Mis-selling of insurance or for that matter any financial service is not only unethical but cruel in a country where a substantial part of the population is not enough literate in financial matters. The inability for the financially illiterate to understand the implication of insurance and banking terms written in small print makes a mockery of the entire financial system.
 
Role of Moneylife in protecting victims of mis-selling financial products
 
Against this state of affairs in our country, the movement initiated by Moneylife Foundation to guide, educate and protect the victims of mis-selling without any expectation of reward or return, is a laudable effort. They deserve the support of every citizen of this country. Only by spreading financial literacy and empowering people will there be hope to minimise mis-selling, which has considerable implications on the life of an ordinary person. 
 
The success stories of Moneylife Foundation published in the recent past in securing justice to several victims of mis-selling is a testimony of how a non-governmental organization (NGO) and not-for-profit institution could achieve success without any support from the government.
 
Let us, therefore, put our shoulders to the wheel of Moneylife Foundation by contributing our mite through our ‘tan, man and dhan’ to support a movement that can provide succour and relief to a large number of our people, but can survive only with your support and patronage. 
 
 
 
(The author is a banking analyst and is a regular contributor on banking and finance. He writes for Moneylife under the pen-name ‘Gurpur’.)
 

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COMMENTS

Harish

3 years ago

Crows are black everywhere

REPLY

nagesh kini

In Reply to Harish 3 years ago

But in India they are a shade worse.
All because the penalties are low and offenses are compounded.

Harish

In Reply to nagesh kini 3 years ago

But in India there is a jail sentences in so called free world, the penalties depends on your status. If you are an Individual(specially Origin matters) you get prison & penalty, If you are a corporate you only get penalty, If you are employee of a corporate you are free. You can have a look at history(LIBOR, Money Laundering,Insider Trading, etc. )
Sir, do you know Mr. Rajasundaram(may be) is getting executive treatment in Murican prison. He is sentenced for insider trading with poor IITian Mr. Gupta.

McDonald’s India and Westlife Development: What’s cooking?
Westlife Development, which recently completed the acquisition of Hardcastle Restaurants, a franchisee of McDonald’s Restaurants, suddenly suffers a drop in price after being locked in an upper circuit almost non-stop since January 2009.
 
The stock price of Westlife Development (franchisee of McDonald’s in West and South) dropped 24% from its peak of Rs437.50 on 23 August 2013 to Rs332.90 on 6 September 2013. The price had risen non-stop by 2487% from an adjusted price of Rs16.91 as on 3 December 2012 to Rs437.50 as on 23 August. During this rise, excluding the few bulk deals, on an average just 2-3 shares have been traded per day over the one-year period. In December last year, it was announced that Hardcastle Restaurants, the franchisee of American fast-food chain McDonald's would become a 100% subsidiary of Westlife Development. The deal became official on 20th August.
 
A week later, a few promoters sold part of their share holding, pocketing nearly Rs100 crore. Along with this, in an announcement, McDonald’s India said that Vikram Bakshi, would no longer be the managing director of Connaught Plaza Restaurants, McDonald’s franchisee in North and East India for the past 15 years. According to media reports, Bakshi says that he has been unfairly treated by McDonald’s and will take legal recourse.
 
On 28th August, a total of 29.15 lakh shares worth Rs99.25 crore were sold by the promoters at an average trading price of Rs341 per share. Two promoters of the company—Lalita Devi Jatia and Usha Devi Jatia offloaded almost their entire holding amounting to a total of 16.77 lakh shares. While another promoter—Amit Jatia, vice president of Westlife Development, sold 62% of his stake in the company. Was this another inter-promoter transfer similar to many occasions in the past? In fact not, according to an email reply from Shatadru Sengupta, senior director, legal & company secretary at McDonald's India (Hardcastle Restaurants), “it was not an inter promoter transfer. FIIs bought the shares, as reported to the stock exchange.”
 
On 20th August, pursuant to the scheme of amalgamation of Westpoint Leisureparks and Triple A Foods (majority shareholder of Hardcastle Restaurants), Westlife Development allotted 5.86 lakh equity shares of Rs. 2/- each to the shareholders of the erstwhile companies. Speaking at the Bell Ringing Ceremony at the Bombay Stock Exchange (BSE) where BL Jatia, chairman of Westlife Development, sounded the bell at the start of trading session, Amit Jatia, said that “There has been a huge demand for Westlife shares ever since we submitted the scheme to the Court. From today, interested investors will be able to actively participate in the company through a much larger base of available shares.” Before this, the company just had a total of just 64 shareholders including the promoters. Public’s “participation” coincided with a sharp fall in price as Amit Jatia sold his entire HUF (Hindu Undivided Family) stake of 2.21 lakh shares and sold over 60% of his own 16.42 lakh shares of the company, held directly in his own name.
 
Moneylife had earlier pointed out (Read: Westlife Development: Low or no volumes and 2,20,000% price rise! and I'm Not Loving It: Big Mac's strange Indian franchisee
) as per the shareholding disclosure dated March 2013, apart from the 12 shareholders that form the promoter group making up for 75% of the total shares, there were just 52 other shareholders of the company. Out of these 52 shareholders, four hold nearly 24.17% of the total number of shares. The remaining 0.83% of the shareholding (equivalent to approximately 1.50 lakh shares) is divided among the remaining 48 shareholders. The number of public shareholders as on 17 August has increased to 61.
 
Is McDonald’s giving preference to Hardcastle Restaurants?
 
McDonald's has two Indian entrepreneurs, both, which had started out in 1995-96 as joint ventures: Vikram Bakshi's Connaught Plaza Restaurants, which is still a Joint Venture with McDonald's Corporation, manages restaurants in North & East India and Amit Jatia’s, Hardcastle Restaurants, handles McDonald's operations in West & South India. In 2011, Hardcastle Restaurants was awarded a development licensee status by McDonald’s. 
 
Coincidentally, a week after Hardcastle Restaurants officially came under Westlife Development, McDonald’s India in a notice published in select newspapers on 30 August said that Vikram Bakshi is no longer the managing director of Connaught Plaza Restaurants, a 50:50 joint venture company between McDonald’s and him. It added that Bakshi’s term as managing director ended on 17th July. According to media reports, Bakshi, who was the managing director of the company for 17 years, has taken up the matter with the Company Law Board and would seek his reinstatement as managing director.
 
Media reports mention that he would also challenge the "differential treatment" by McDonald's towards its two partners in the country and putting undue restrictions on him. Between 2008 and 2012 McDonald’s had imposed a cap on his debt and therefore he was restricted to grow the business. Reports also mention that while he continued to pay a 5% royalty to McDonald’s, the royalty paid by Hardcastle Restaurants was reduced to 2%.
 
Westlife Development (Earlier named: Dhanaprayog Investments Co) used to offer investment and allied financial services, its license as a NBFC was cancelled in 2009. Three years back in June 2010, we had reported about the unusual trading and the huge surge in price at that time as well. (Read: Unquoted) The company in the past has been pulled up and fined by the regulator; however, it got away through a consent order. But McDonald’s does not seem to mind. 
 

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COMMENTS

Tanvi

3 years ago

It is very evident that the two partnerships have been treated dufferently. But I fail to understand why would McD favour a company involved in rigging stock price, & insider trading?

sanjay

3 years ago

only a more detailed investigation by SEBI / money life can yield more information ..

Nishrit

3 years ago

It is rather disconcerting that after so much apparent favoritism shown no action has been taken. One of the franchisee's seem to clearly be involved in rigging stock prices, circular trading and insider trading, yet they are getting all the benefits. Makes no sense! Why should there be different treatment for 2 similar companies that have started at the same time. There is clearly more to this that is not being revealed to us.

sanjay

3 years ago

keep up the good work sucheta .. you never know when somebody in the corridors of power sees it and wakes up

Mehuldoshi800

3 years ago

I have read many articles by you about corporate malpractices but it looks like no one in the authority cares.What I respect you for is that regardless of consequences(i.e.respective authorities doing nothing) you do carry on pointing.It must be very frustrating.

Trade Tech

3 years ago

Hi Sucheta,

Good work on this! But I have a feeling you might be scratching the wrong door here. Might be a little more easier and much more effective to tug on another thread.

Luckily (for the sake of getting more transparency that is), one of the involved party in this case is also a listed corporation in the United States. And you CANNOT so easily wriggle out of such shabby corporate governance and extremely questionable dealings under the SEC's watch. With what you have revealed so far, they will without doubt need to answer a LOT of questions if the SEC is made aware of these facts.

Let me give one example: If I have read your report correctly, it appears that a listed US company has given away (for free?) its 50% equity interest in company which as per today's market price would be worth INR 2500 Crore. Why? If this is so, then that is a loss for all shareholders of the US listed company. Was there a reason for donating all this money which is eventually money of the shareholders of the US listed corporation. The corporation will have to explain the rationale behind it.

This appears to be a fit case top be scrutinized under the United States Foreign Corrupt Practices Act (the one which was lately in news in relation to the Walmart case).

Anyone can file a complaint for a possible violation under this act at the following link:

http://www.justice.gov/criminal/fraud/fc...

REPLY

Divya Singh

In Reply to Trade Tech 3 years ago

Agree with you on this one - extremely interesting article here, but it seems that an SEC investigation should be done on this that sheds some light on what is going on here. McDonalds Corporation needs to be held accountable and cannot be getting absorbed into bad business pratices and bribery that could be at play here with Hardcastle.

sanjay

3 years ago

u r right . the courts threw Mc donalds out of that prime property !!

KAVIRAJ B PATIL

3 years ago

A couple of months ago, there was an article in Economic times about a lady aged around 80-85, was fighting a case over her property which housed a MCdonald's. Guess, ethical business is alien to them.

sanjay

3 years ago

Another small & interesting observation -- Mcdonalds is the only restaurant chain of its size, reputation & brand visibility which :

1. Does not accept cards for payment of bills .

2. Does rounding off on all Invoices

3. Invariably, rounding off takes place to the higher value of the rupee.

4. The unsuspecting consumer is never even aware , he does not care for a few fifty , forty paisa here & there ..

5. Every day , Mc donalds raises lakhs of invoices across its stores countrywide,, imagine the hidden charges that it levies on its customers !!

Even though it is small change , it counts !!

sanjay

3 years ago

Mc donalds is involved in fishy business transactions - no doubt about it . It is also being partisan in its approach / treatment of its JV partners .

Bharat Parashar

3 years ago

What is going on here? Why is McDonalds treating it's business partners differently. Is there something that does not meet the eye? A good time for some investigative journalism.

Bharat Parashar

REPLY

Sucheta Dalal

In Reply to Bharat Parashar 3 years ago

Please read all our stories .... we believe it is investigative journalism. But when the regulator is dumb, deaf and blind and does not see this what can you do?

The silence of these companies over the past two years is deafening. The two stock exchanges are silent too.

You as a reader remain silent and then we are shocked when an NSEL happens!

Do tell us how you can join in this effort. There is only so much that a tiny organisation can do.
Also check out http://foundation.moneylife.in

We would like to see reader participation along with expectations from us!

best

Sucheta

Trade Tech

In Reply to Sucheta Dalal 3 years ago

Kudos! Have suggested another route (as a comment above) to help you in investigating this further.

AJ

3 years ago

There are several areas in this story which are deeply troubling and indicative of both unethical and questionable business practices as well as illegality and criminality.

The suspicious frankly incredible price rise and share price movements / circular trading in an illiquid and formerly closely held company, just before it lists is indicative of insider activity and manipulation, to the detriment of minority shareholders. SEBI and US Securities and Exchange Commission ( SEC ) where McDonalds is listed have systems where such malpractices are identified and this should be pointed out to them so that the wider shareholding public is not defrauded.

McDonalds should be very aware that they run a serious reputation risk, in being seen as guilty by association with a franchisee seen to be indulging is such practices.

An investigation into the activities of McDonalds and their franchisee in India ( Hardcastle / Westlife ) is called for under US Foreign Corrupt Practice Act 1977 (FCPA)whether unduly favourable treatment to Hardcastle / Westlife has been disguised facilitation payments to Government officials routed through the Franchisee.

Sanajy Verma

3 years ago

Why is there different treatment for the 2 companies that started out at same time. Why is a company involved in rigging stock price, circular trading & insider trading being favored by McDonalds? Are their other considerations that are not visible to the naked eye. What a shame!

Sanjay Verma
United States

Kusum Behari

3 years ago

Why is there different treatment for the 2 companies that started out at same time. Why is a company involved in rigging stock price, circular trading & insider trading being favored by McDonalds? Are their other considerations that are not visible to the naked eye. What a shame!

Sanjay Verma
United States

Kusum Behari

3 years ago

I am appalled. WHAT IS WRONG with McDonalds? What happened to ETHICS and Fair Business Practices? US SEC needs to step in. Clearly Bakshi is not being treated fairly.
How come McDonalds overlooked it and still favoring WESTLIFE DEVELOPMENT? Obviously, it is known for its unethical history. Who knows how many more FACTS are hidden at this point.

Finance Ministry takes over FMC, finally
The commodities market regulator would now be controlled by the Finance Ministry instead of Consumer Affairs Ministry
 
Commodity markets regulator, Forward Markets Commission (FMC), will now be under the administrative control of the Finance Ministry. With this, all the financial sector regulators, Securities and Exchange Board of India (SEBI), FMC, Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA), have been brought under one roof.
 
According to the Hindu, the union government has issued an order changing the allocation of business rules. "This enabled the Finance Ministry to get control of FMC from the Consumer Affairs Ministry. The commodity regulator will work under the Economic Affairs Department of the Finance Ministry," the report says.
 
This changeover intends to help the union government to have better coordination among all the regulators for resolving the Rs5,600-crore payment crisis of the National Spot Exchange Ltd (NSEL).
 
Although, NSEL was not regulated by any regulator after the crisis, FMC was empowered to supervise and take action in resolving the matter.
 
Since commodity forward is also a kind of financial transaction and Financial Sector Legislative Reforms Commission (FSLRC) has recommended to bring all financial transactions (barring banking which will continue to be regulated by RBI) under one regulator i.e. SEBI, ultimately FMC will be merged with SEBI, the report says.
 
The recommendation of creating unified financial authority (UFA) looks revolutionary on paper, but is neither practical nor of any use. From the consumers’ perspective, the track record of these regulators is a huge disappointment. In fact, there is hardly an example about an investor or saver receiving satisfactory redressal of his grievances from these regulators.
 
“This proposed UFA would also take over the work on organised financial trading from the Reserve Bank of India (RBI) in the areas connected with the bond-currency-derivatives nexus, and from the FMC for commodity futures, thus giving a unification of all organised financial trading including equities, government securities, currencies, commodity futures, corporate bonds, and so on,” the FSLRC set up under the chairmanship of Justice BN Srikrishna, had said.
 
However, this will be a long process as this will require repealing Forward Contract Regulation Act and bringing amendment in SEBI Act.
 

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COMMENTS

Amit Bhargava

3 years ago

FMC under an allegedly corrupt and Investor Hostile SEBI? Another joke on investors.

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