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RBI has warned banks that it is taking a closer look at the ‘perverse incentive structures’ that are leading to ‘widespread mis-selling’ of third party products such as insurance to account holders
Intense competition and perverse incentive structures have frequently led to widespread mis-selling of products and misdirection of clients to inappropriate and risky investments by financial service providers, says the Reserve Bank of India’s (RBI) financial stability report released on 27 June 2013.
Para 3.50 of the Financial stability report states that “There seems to be an urgent need to revisit the marketing and sales strategies used by the banks in pushing insurance products, especially since insurance is among the more complex of financial products for the common man to fully comprehend”.
Regarding insurance as a third party product para 3.52 states that “Banks have been advised to disclose to the customers, details of all the commissions / other fees (in any form) received, if any, from the various companies for marketing / referring their products, even in cases where the bank is marketing/ distributing/ referring products of only one company”
Regarding mis-selling in wealth management and other related activities para 3.55 states that “The recently notified SEBI (Investment Advisers) Regulations, 2013, contain detailed norms for risk profiling and suitability, creation of a Separately Identifiable Department or Division (SIDD) for IAS, detailed disclosure to the clients including any conflicts of interest, redressal of investor grievances, etc. Such norms are expected to address mis-selling risks to a certain extent”. Read RBI reviewing guidelines on mis-selling by banks in wealth management services
Earlier, the focus of the Open House session organised by Moneylife Foundation with the RBI deputy governor Dr KC Chakrabarty was on various aspects of banking services, including mis-selling of third party products, grievance redressal system and technology glitches in banks.
While accepting that mis-selling should not happen in banks, Dr Chakrabarty had said, “Mis-selling is same across banks and brokers and we need to first identify what is mis-selling. For example, insurance penetration in our country is just 5-6%. However, even the highly educated people fall for ‘higher returns’, rather than the insurance cover and sign papers blankly”.
Moneylife Foundation placed before the deputy governor, a few submissions regarding third party products.
Selling process: If they continue to sell these products, a specific sign off by the customer on all clauses denoting risk factors and disclosure is a must. The BCSBI along with consumer bodies can be asked to work on these in a time bound manner but not more than three months.
Onus on banks: The onus of selling products appropriate to customers must be on the banks. Otherwise, they will keep selling a five-year locked in mutual fund to a 79-year old man. Or sell ULIP to a 60+ retiree, which requires hefty premium payments to be made for five years before it starts making any returns at all.
Paper trail: Banks must be made responsible to create proof and trail mail/hard copy when relationship managers/tellers accost customers at home or at the banks. A clear email spelling out specific terms and pros and cons must be sent to the consumer.
Compensation: RBI must codify compensation to victims of mis-selling. Since the onus of proving appropriateness of products must be on the bankers, there must be detailed specified penalties when mis-selling is established.
Moneylife had even written a memorandum to the RBI in context to mis-selling, it can be found here.
Regarding Technology issues para 3.60 of the report states that “While leveraging on technology has resulted in many benefits, especially, in extending the reach of the financial services, these developments pose challenges in the form of regulatory, legal and operational risks”. Moneylife has come up with certain suggestions for the same: There must be an annual IT audit to verify the robustness of banks systems and their calculation of tax deductions, interest and equated monthly instalments. Mistakes, such as SBI’s 40% deduction, must be reported to RBI along with corrective action.
Regarding KYC para 3.56 of the report mentions that “All financial sector entities need to comply with the extant KYC, which are meant for safeguarding the financial system against the possibility of its use for money laundering” which Moneylife has been advocating since a long time.
RBI has clearly listened to what we have said with some seriousness. However, flagging these issues in the financial stability report is only the first step; consumers may have to wait for a real change in rules that ensures an end to mis-selling.
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You can watch the
Open House session with the Deputy Governor Dr KC Chakrabarty here.