Predatory selling tactics of producers and intermediaries alike, combined with erratic regulations, have combined to drive retail investors to the safety of bank deposits
Last month, Bloomberg UTV, supported by the MCX group, gave out awards to several "financial leaders". One of the leaders given an award was India Infoline (IIFL). Five months ago, Moneylife exposed how IIFL had put out a 'buy' on the Money Matters stock only a few days before the Money Matters scam was unearthed. (Read, "India Infoline put out a 'buy' on Money Matters a few days before the scam was broken by Moneylife; FIIs are livid. Stock down 15%" .) India Infoline has been in the news before that also. Mid-2009, the MiD-DAY newspaper reported that horrified clients from across the country had accused India Infoline of trading in their demat accounts 'without permission or authorization'. (Read, "In the line of fire" .) Following the newspaper exposé and a complaint filed on the matter, an India Infoline director was arrested. (Read, "India Infoline director arrested for fraud" .)
That's not a great recent record of leadership, and Bloomberg UTV and MCX should have known. Of course, leadership awards of globally renowned brands can easily go to financial firms embroiled in controversies. It is all part of the financial game, a game that market players make very rewarding for themselves. But it is not a win-win game. There are losers in the game too-the vast multitude of retail investors. Their story is in the macro numbers that we described in the previous part of this article on Tuesday. The fact is that the retail investor population has actually declined, despite a booming market and rising volumes. But if this was only based on bland macro data, something that one cannot relate to, it would not have been as shocking.
Of course, the picture of the diminishing investor population relative to rising prosperity is captured not just in macro numbers. It is evident also in the anguished emails that we receive, the grievances we redress and occasionally in the stories like the one in MiD-DAY. The stories of wrong-selling and wrong-buying are reflected in the macro trend and show how deep-rooted the problem is. Without finding a way to bridge the wide gap between the buyer and seller, a nationwide chain of distribution will work sub-optimally.
The problem starts with producers and manufacturers of financial products, which immediately gets transmitted to their distributors. (Some of the people we have dealt with can barely write correct English.) They all run operations with high overheads that can be funded only by sharply rising revenues and profits. This leads to steep sales targets. Then comes the problem with the products themselves. Most insurance products are extremely complicated. Mutual funds are sold like variants of shampoos. The less said about portfolio management services and structured products, the better. The only people who make money out of such toxic stuff are the banks, other distributors which sell them, and the the brokerages that churn them. An ophthalmologist we know walked into the PMS of JM Financial with Rs45 lakh and walked out with only Rs23 lakh! (For more on PMS, please visit our home page and read the stories under the section 'Portfolio Management Scheme'.)
The perils of the products and practices of the producers soon get transmitted to the sellers. All of them work for commissions, leading to even benign bankers becoming bhayanker. (Read, "Customers need to be vigilant as bankers are turning 'bhayanker', says Ravi Subramanian", ) The incentive system in the stock market favours turnover/churn, and is therefore essentially anti-consumer. While selling a product, the intermediaries make it appear that these are easy to buy and do not require much expertise. The worst kind of mis-selling is done by bankers. They routinely sell unit-linked insurance policies as products with a "guaranteed return", persuading even retired people to move their money out of bank fixed deposits for the sake of quarterly or year-end commissions. Nothing is put in writing. In the event of a problem, your complaint will be heard by the call centre, but the bank official may have already left the job.
A relationship manager (RM) or a wealth manager (WM) working with a private bank has a 'target' to meet. Every bank customer with a sizeable deposit is a target for these managers. His (very often her) daily job is to sell an insurance product, a structured product or a PMS scheme to a depositor and earn commissions. Neither to they understand the product, nor do they care for customers.
One comment on our website says: "Relationship managers are the smartest tricksters moving and breeding on Indian banking soil (rather granite floors). They get their salaries from the banks and kickbacks (respectably named incentives or target bonuses, in various forms and hues) from the fund houses and ULIP companies. And when it comes to solving a problem (that is of their own making), it took me about three months of frantic persuasion thru emails (I reside overseas) to get it resolved by one of these banks, with at least four different persons from their so-called customer services cell appearing on the scene and driving me mad. Does one need further proof of the doings of this new breed, than the current fraud and swindling done by one of such smart asses in Citi Bank, Gurgaon? That is the stuff that this new breed called RMs is generally made up of."
Another person wrote: "A majority of the RMs and WMs can be painted with the same brush-carbon black! The reason? The same lot is hopping from bank to bank and the social net working among them is a potent weapon that they use to identify their prey… The way the banks and other institutions, working in concert with each other, are defrauding people, it has become impossible to take anyone or anything on its face value!" We can describe more of such cases, or you could read them yourself on our web site and other web sites like www.mouthshut.com. The stories are the same and so is the outcome-no redressal. That's where the role of the regulator comes in.
As we had highlighted in the third part of this article, financial products are different from durables. Durables are backed by science, are constantly improving and can be replaced if something goes wrong. In this case competition usually works. Financial products are not constantly improving, but they are backed by craft and commissions. So, here, competition does not work. For they all follow the same practices.
This is precisely why financial products are supposed to be closely regulated. But are they? Well, not when it comes to protecting the investors and weeding out mis-selling. There is a simple course open for the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI)-mete out exemplary punishment, such as suspending the licence to sell products for a period of six months to a year. Unfortunately, regulators have never taken such a step. Indeed, they have been mucking around about their territorial issues or bringing in half-baked solutions that can kill a business (mutual funds). Investor protection, promoting fair business practices and punishment that forces a fundamental change across the industry has not been on their agenda. (Moneylife is the only publication that has done extensive work on this, including a cover story. Read, "Hearing Aid for Regulators" )
Indeed, India Infoline could argue that what it does is exactly what most other financial firms do. Sadly, that is true. So, kicked around by the regulators, producers and intermediaries, there is little chance that a trusting saver would become a life-long customer of any other financial products except bank deposits. This is the essential truth that private equity investors, who have invested hundreds of crores in retail distribution businesses, missed. Or were they simply lemming-like and greedy? That is another story.
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