RBI has asked banks to follow its 'treating customers fairly' policy while selling third party products like mutual funds, capital market products and insurance policies
Reserve Bank of India (RBI) has asked banks to follow its 'treating customers fairly' (TCF) policy for third party products like mutual funds, capital market and insurance that are often mis-sold. The central bank also decided to extend its Banking Ombudsman Scheme (BOS) to non-scheduled banks.
RBI, in a paper 'Trend and Progress of Banking in India', mentioned 232 recommendations made by the Damodaran Committee on Customer Services. However, the central bank has implemented only 155 recommendations of the Committee so far. Some of the important recommendations which are yet to be implemented are, minimum account balance- transparency, uniformity in charges for non-maintenance, charges for basic services, compensation for wrong returns of cheques by banks, internet banking - secure total protection policy, home-loans - non-discrimination between existing and new borrowers with floating interest rate and onus on banks to prove customer negligence. "The Reserve Bank is in consultation with the Indian Banks’ Association (IBA) for early implementation of these recommendations," the report says.
Treating Customers Fairly: Obligation of Banks towards Customers
Treating Customers Fairly (TCF) is a consumer protection policy designed to address the problem of asymmetric information in the financial services industry where financial service providers possess certain information that the consumers do not. It is a regulatory initiative by which firms are required to consider their treatment of customers at all the stages of the product life-cycle, including the design, marketing, advice, point-of-sale and after-sale stages. By encouraging firms to re-evaluate their company culture and to inculcate the attitude of treating customers fairly, the outcome is likely to result in a more optimal one from the perspective of regulators, consumers and ultimately, firms. TCF is an initiative that was introduced by the Financial Services Authority (FSA), UK in 2006.
In recent years South Africa also adopted TCF based on the UK version. South Africa’s projected timeline for full implementation of the TCF policy is 2014.
As per FSA, 2006 desired outcomes of the TCF programmes are:
(i) Consumers can be confident that they are dealing with firms where fair treatment of customers is central to their corporate culture;
(ii) Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
(iii) Consumers are provided clear information and are kept appropriately informed before, during and after the point of sale;
(iv)Where consumers receive advice, the advice is suitable and takes account of their needs and circumstances;
(v) Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect; and
(vi)Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint
These outcomes of TCF are now well accepted across countries. In order to achieve these outcomes, cultural and operational aspects of the bank may need to change. Also, the firm needs to consider what the TCF programme means for each phase of the product life cycle.
In terms of implementing the TCF programme, the UK experience suggests that however well-worded the principles and rules may be, there are additional factors affecting successful implementation. This includes a change of mindset in the firm’s leadership. Successful adopters of the TCF programme have been those where the CEO or managing director of the firm had typically endorsed the programme, spelt it out for middle management and employees and received regular data on consumer complaints and redress. Moreover, TCF measures were used to influence performance appraisal and incentive structures in a firm. The least successful firms were those that left it all to their compliance department (or an outside consultancy) to design a programme but whose feedback was neither presented nor understood at the Board level.
The Reserve Bank has also taken a lead in ensuring that bank’s customers in India are treated fairly. Over the years, it has initiated several customer-centric measures and inculcated a culture of treating customers fairly through regulatory and supervisory interventions. The Reserve Bank initiative led to the setting up of the Banking Codes and Standards Board of India (BCSBI), an autonomous and independent body, which has been entrusted with the task of setting codes and standards for banking services in India. The Codes of Commitment are binding on BCSBI members and non-compliance thereof by member banks is a valid ground of complaint under the Banking Ombudsman Scheme (BOS). In a bid to empower consumers and protect their rights, the Reserve Bank has also instituted the Banking Ombudsman Scheme as an apex level, cost free grievance redressal mechanism for deficiencies in services by banks.
The intent and basic structure for TCF is in place in India for banking products of scheduled banks. However, it is now being considered to extend the TCF structure to third party products, viz., mutual funds, capital market and insurance products sold by banks and also extending the BOS Scheme to non-scheduled banks, RBI said.
As per RBI paper 'Trend and Progress of Banking in India', during March, 2013, an online media portal raised certain allegations against three private sector banks that these banks were indulging in practices that encouraged money laundering, sale of gold and other third party products such as insurance and wealth management.
The central bank then scrutinised 39 banks and issued show cause notices to 36 banks. "After considering the facts of each case and the individual bank’s reply, the Reserve Bank came to the conclusion that some of the concerns were substantiated and warranted imposition of monetary penalty. Monetary penalty was imposed on 31 banks," the report said.
In April 2013, Moneylife Foundation sent a memorandum to RBI governor on behalf of more than 21,500 members to free the system of mis-selling of financial products by bankers, misusing the savers’ trust.
Moneylife has for long been highlighting the mis-selling of these services with specific examples. This was among the many issues taken up by Moneylife Foundation with RBI deputy governor, Dr KC Chakrabarty, at an Open House meeting in June 2013. In a recent cover story on such issues, (Read: Banks Vs Depositors ) Moneylife pointed out how selling of insurance, mutual funds and equity advisory services by banks have affected customers, who do not know which regulator will redress their grievance. RBI ignores complaints about third-party products (some are not even regulated), while Securities and Exchange Board of India (SEBI) and Insurance Regulatory Development Authority (IRDA), both already poor at grievance redress, are even more reluctant to address complaints about mis-selling by banks.
Moneylife has highlighted several stories on mis-selling. A year ago, we wrote about how HSBC Bank promised Suchitra Krishnamoorthi, a well-known singer and actor, extravagant assured return of 24% from mutual funds as well as insurance, but instead continuously churned her portfolio. (Read: HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns).
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.
After Moneylife raised these issues at several platforms, earlier this month market regulator SEBI issued a show cause notice to HSBC to explain why its acts in handling the portfolio of Suchitra Krishnamoorthi are not in violation of its regulations governing fraudulent and unfair trade practices and violation of the code of conduct governing mutual fund distributors.
In another such case, 79-year old Mangelal Sharma was persuaded by IndusInd Bank officials to break his fixed deposit with the bank and invest in a mutual fund product saying it was a low-risk banking product. Moneylife’s aggressive stance on mis-selling by banks, and campaigning against this case led the Bank refunding the money back to Mr Sharma (Read: Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory )
Complaints against ATM/debit/credit cards and foreign bank rising
According to the RBI report, complaints about ATM, credit and debit cards continued to dominate, accounting for about 25% of the complaints received by the Banking Ombudsman. Next in line are complaints relating to non-adherence to the Fair Practices Code and non-adherence of the codes laid down by the BCSBI.
More number of complaints against foreign and private sector banks
Although public sector banks accounted for a larger share in the total number of complaints, when normalised by the number of bank branches and accounts (deposit + loan accounts), the number of complaints about foreign banks worked out to be the highest followed by private sector banks (Chart IV.30). In 2012-13, there were 1,543 complaints per 100 bank branches of foreign banks, highest among all bank groups, the RBI said.
To avoid problems like Campa Cola later on, home buyers and cooperative societies must ensure that the issue of conveyance deed is sorted so that the CHS becomes title holder of the society land
In the final piece in the run up to Vinod Sampat event to be held on 23 November 2013 in Mumbai, Mr Sampat talks about one of the most pressing issues that home buyers, cooperative societies and apartment owners face today: conveyance deed or deemed conveyance. To avoid major problems later on, or to avoid problems such as Campa Cola compound residents, you will need to first resolve the issue of becoming legal title holder of the land through conveyance deed or deemed conveyance. In the Campa Cola compound case, since the builder constructed illegal floors, it never handed over the land of the plot to the Society (deemed conveyance) as mandated under the laws.
Whose responsibility is it to convey the title?
As per the provisions of section 11 of the Maharashtra Ownerships Flats Act (MOFA), the promoter is duty-bound to complete his title and convey the same to the organisation of persons who had bought the flat (i.e. cooperative society, CHS, home buyer, apartment owner, etc). The Conveyance has to be executed and the promoter or builder has to deliver the title relating to the property. It is also the duty of the promoter to file a copy of the conveyance with the flat purchasers and the competent authority under section 11(2).
The buyer after forming a cooperative society (or CHS) also can approach the competent authority for obtaining a unilateral deemed conveyance in favour of the legal entity i.e. cooperative society, CHS, apartment or a company.
The competent authority on receiving such application shall within reasonable time but in any case, not later than six months after making such enquiries as deemed necessary, after verifying authenticity of the document submitted, after giving the promoter reasonable opportunity for being heard, shall issue a certificate to the sub-registrar or any other appropriate registration authority under The Registration Act, 1908. This certifies that there is a fit case for enforcing unilateral execution of Conveyance Deed, conveying the right title and interest of the promoters in the land and building in favour of the applicant as Deemed Conveyance.
Submissions made by the cooperative society or apartment owner to the sub-registrar shall, (or the appropriate registering authority), on the basis of the certificate issued by the competent authority, along with the unilateral instrument of conveyance, notwithstanding anything contained in The Registration Act, 1908, issue summons to the promoters as to why unilateral instrument should not be registered as Deemed Conveyance.
After giving the promoter reasonable opportunity of being heard, after being satisfied that is a fit case for unilateral conveyance, (the competent authority or sub-registrar) shall register instrument as deemed conveyance.
Deemed conveyance in our view is doomed conveyance
You should approach consumer forum where you can get the property card transferred directly besides daily compensation for not getting building completion certificate. In Environ Emmanual CHS Ltd, an order was passed in 128 days by consumer forum. However, normally it takes one to two years. Interim order may be passed in about four hearings.
“Speed money” in deemed conveyance is an open secret ALLEGED by one MP. Despite political will, a small percentage of the societies have got deemed conveyance order. Irrespective of the claim of authorities not even 25 societies, in our view, have got the property card transferred in their name till date.
Other conveyance-related issues covered by Moneylife in the past can be accessed below:
Many housing societies are keen for redevelopment but they cannot go for redevelopment for want of conveyance. Advocate KK Ramani, an expert on realty issues, spoke recently at a Moneylife Foundation seminar, explained the intricacies of the laws governing housing societies. Check out the entire write up here:
The video of the KK Ramani’s Deemed Conveyance seminar event can be accessed here:
Previous parts can be accessed below:
Check the first part over here
Check the second part here
Check the third part here
Check the fourth part here
Those seeking help or advice on CHS issues can contact Moneylife Foundation’s Legal Resource Centre (LRC) ( http://moneylife.in/lrc.html )
(Adv Vinod Sampat is a practising lawyer since past 28 years. He has authored several articles on property-related matters and written 46 books on cooperative societies, transfer of flats, recovery of dues, registration and stamp duty matters. He has been an Hon. Patron member of the Estate Agents Association of India. He is also the Hon. Advisor of the Federation of Accommodation Industry of India and is an advisor to the Maharashtra Chamber of Housing Industry as well as the Federation of Accommodation Industry in India, apart from being part of many committees and winning several honours.)
Over the six-month period from April 2013 to September 2013, Independent Financial Advisors (IFAs) contributed the maximum (37%) to equity mutual fund sales
Most Independent Financial Advisors (IFAs), a ‘small’ mutual fund distributor community, were worried that they would lose business with the launch of direct plans of mutual funds. Many even complained that few of their clients have shifted to direct plans. However, IFAs, who cater mainly to small investors, have not only been successful in creating new mutual fund accounts in beyond the top 15 cities (B15 cities) they have done comparatively well in the top 15 (T15) cities as well. From their contributions to new systematic accounts created, it can be said that IFAs are not only promoting one time investments, but are encouraging regular savings as well. IFAs increased their share of equity mutual fund sales to 37% in H1FY14 from 33% in H1FY13.
Taking all mutual fund categories into consideration, IFAs contributed the highest share of 33.25% to new accounts created for bullet investments and 30.19% to new SIP accounts created between April 2013 and September 2013, according to data from CAMS, a registrar and transfer agent for mutual funds which accounts for 60% of the industry data. Overall, they contributed 31.74% to the total number of new accounts created. The next highest were other banks with a share of 23.74% in the six month period.
Equity Mutual Fund Sales
Despite a marked increase in the contribution of direct plans to equity mutual fund sales, IFAs too, managed to increase their share, even though the quantum of sales declined. The share of direct plans in equity mutual fund sales rose to 13% in H1FY14 from 5% in H1FY13. IFAs, managed to increase their share to 37% in H1FY14 from 33% in H1FY13. Banks witnessed a sharp decline, with their share falling to 18.52% from 26.08% over the same period. In H1FY14, national distributors had a share of 22%, while PSU banks had the lowest share of 2.33%.
In the T15 cities, IFAs took the lead for the top share in equity mutual with 31% in H1FY14 from 27% in H1FY13 surpassing national distributors and other banks which commanded a higher share for the same period the previous year. In the B15 cities, though IFAs still contribute more than half to the total equity mututal fund sales, their share fell marginally to 54% in H1FY14 from 55% in H1FY13. In these cities, national distributors increased their share to 16% from 11% in the same period last year.
SIP accounts created
IFAs also have the highest share for the number of new mutual fund SIP accounts created in H1FY14. In T15 cities IFAs have a share of 28% in the total new SIP accounts, marginally higher than national distributors which command a share of 27%. In B15 cities where IFAs have the strongest presence, they contributed 33% to the total number of new mutual fund SIP accounts created, while other banks and national distributors had a share of 22% and 21% respectively.
In T15 cities, other banks contributed the highest to new accounts created for lumpsum (or bullet) investments. IFAs were the second highest contributors with a share of 27%. In B15 cities, IFAs once again took the lead with a share of 46%. National distributors were the closest with a share of just 16%.
Despite this huge contribution from IFAs, the regulator continues to ignore this ‘small’ distributor community by coming up with regulations that harms their business. (Read: Mutual fund regulations: Who contributes the most to equity inflows is overlooked) Many IFAs have been asking for a ban on upfront commissions. Moneylife has highlighted in many articles in the past where distributors have resorted to excessive churning to earn higher commissions. Chilukuri KRL Rao, a small distributor from Hyderabad, has drawn our attention to the ground-level practices that hurt investors and smaller distributors. He says, “Small distributors who cater mainly to the small retail investors are willing to work even with low trail commissions due to their cost efficient business model. But, the main hindrance to the growth of the industry seems to be the way these incentives are being paid to a distributor.”
In a recent article, (Read: Equity mutual funds report rising sales outside top 15 cities!) we pointed out that mutual fund houses could be paying a higher upfront commission to national distributors for sales in B15 cities. This could be a reason why equity mutual fund sales in B15 cities have shown a growth while all investor categories in both T15 and B15 cities have reported a decline in sales. The Association of Mutual Funds in India (AMFI), has been known to support big fund houses and large distributors. Last year, AMFI scrapped the plan to ban upfront commission. Trail commissions, though lower than the one-time upfront commission, support the business model of small distributors and IFAs as they establish long-term relationships with their clients.