How a proactive RBI forced HSBC to partly redress glaring mis-selling by HSBC to actor Suchitra Krishnamoorthi. Will this set a precedent? Don’t bet on it
On 14th March, the Hongkong & Shanghai Banking Corporation (HSBC) suddenly called actor Suchitra Krishnamoorthi to discuss a settlement to close her long-pending allegation about gross mis-selling that had caused her a loss of over Rs1.85 crore.
Despite letters to Naina Lal-Kidwai, the high-profile head of HSBC, and legal notices to the Bank, she had come to a dead end. All that the Bank had offered was to waive its charges and commissions and re-invest her money in the hope that they will earn some more revenue. Clearly, this was unacceptable. She had filed a complaint with the banking ombudsman, but without any effect.
In early April 2012, she approached Moneylife Foundation, a not-for-profit organisation, of which I am a founder-trustee. We studied her case and, on 13 April 2012, I emailed Dr KC Chakrabarty, deputy governor of the Reserve Bank of India (RBI), with copies to chairmen of the Securities & Exchange Board of India (SEBI) and the Insurance Regulatory Authority of India (IRDA), secretaries in the finance ministry, Naina Lal-Kidwai and others, about her issue.
Under the guise of ‘managing her wealth’, the Bank had systematically looted her of nearly Rs4 crore through multiple financial instruments. It sold her two toxic unit-linked insurance policies (Rs15 lakh and Rs20 lakh) with a fake assurance of high guaranteed returns on which she incurred huge losses.
In 2007, when she wanted to withdraw funds to buy a house, she was persuaded to take a home loan of Rs1.65 crore to get tax benefits on the claim that monthly instalments could be paid out of investment income. Instead, HSBC relentlessly churned her portfolio to extract income for itself as commissions and entry-/exit-loads. If that wasn’t bad enough, she ended up with a fat short-term capital gains tax because HSBC sold some investments in less than 12 months. Many investments were volatile or underperforming equity schemes rather than debt or liquid funds that were more suited to her profile. So, she paid home loan instalment of Rs2 lakh a month while the Bank relationship managers were busy juggling 38 schemes in her portfolio to keep adding to her losses. She, finally, sold a piece of land to pay off her home loan.
The IRDA chairman’s office was the first to respond to my letter on 16 April 2012 asking for details of her insurance policies. But it merely acted as a post-office, passing on HSBC’s and Tata AIG’s response that the policies were closed.
We calculated the loss due to the churning of her mutual fund portfolio at over Rs29 lakh and suggested that she should file a complaint with SEBI. Although RBI did not send a formal response, the case was examined at various levels. We were also convinced, at that time, that a complaint to the banking ombudsman would be of little use, since its scope is very limited. We requested Dr Chakrabarty to take up the issue of mis-selling of third-party financial products by banks. Meanwhile, Ms Krishnamoorthi filed a complaint with SEBI which she relentlessly followed up with Mr RK Padmanabhan, executive director, SEBI.
In April 2013, Moneylife Foundation held an open house meeting with Dr Chakrabarty which was also attended by the entire top brass of RBI’s customer services division as well as the banking ombudsman (BO) and chairman of the Banking Codes & Standards Board of India. We gave Ms Krishnamoorthi a platform to make a public plea that day.
The RBI was sympathetic and Dr Chakrabarty was especially vocal about his personal view that banks should not sell third-party products. But it needed information to make HSBC pay. R Gopalakrishnan, counsellor of Disha Financial Counselling (a former deputy general manager of the RBI customer services department), stepped in, examined her case and marshalled all the legal and technical points in a two-page note for RBI.
While HSBC held a standard sweeping power of attorney (POA) executed by her, it had omitted to “prepare a financial plan based on the risk profile, resources available and mapping of financial goals as specified by the customer” or do an annual review which was part of the deal. Also, while Ms Krishnamoorthi had blindly signed some letters authorising investments, debits and credits to her account, it had failed to do it in every case under the terms of the agreement. Clearly, the bankers who were recklessly churning her funds were careless.
The end result after five years was a direct loss of Rs83 lakh from investment, Rs28 lakh in HSBC commissions to HSBC, Rs18 lakh from decline in value of two insurance policies, Rs4.5 lakh tax paid on redemption of short-term mutual funds (including Rs1.85 lakh penalty to the income-tax department due to non-disclosure of gain by HSBC to the client) and Rs58 lakh interest on home loan earned by the Bank.
Helpful RBI officials went out of their way to have several interactions with SEBI’s extremely proactive executive director RK Padmanabhan. Both regulators were convinced that Ms Krishnamoorthi had been cheated. SEBI issued a hard-hitting show-cause notice on 1 November 2013, quantifying the loss at over Rs27 lakh and investments that were completely out of line with the risk profile of the customer.
It classified this behaviour as an unfair trade practice and a violation of the code of conduct of mutual fund intermediaries. SEBI’s order threatened not only disgorgement of ill-gotten earnings but also to debar HSBC from the capital market and from buying and selling securities. Yet, HSBC managed to drag the case until March 2014 by seeking more time.
Meanwhile, RBI suggested that she file another case with the BO, which she did, in January 2014, but was rejected instantly on the grounds that it was out of the purview of the BO scheme. Things were beginning to look rather bleak then, but again, following requests from Moneylife Foundation, Dr Chakrabarty granted Ms Krishnamoorti another personal hearing and RBI’s customer services department held several meetings with HSBC officials and Ms Krishnamoorti.
By then, pressure on the Bank from both regulators had mounted to the point that it began to talk about a possible settlement. It was also running out of time and options with SEBI which seemed disinclined to accept its explanations.
So, suddenly, on 14th March, Ms Krishnamoorti received a call from the Bank offering a settlement. We suggested that she insist it should be wound up in a single meeting and that she goes with someone whose presence would give her a psychological advantage. Fortunately, Shekhar Kapur, the well-known director and her former husband, accompanied her. We learn that HSBC began by offering half the ultimate settlement, but when it was rejected, it doubled the amount, subject to various terms and conditions (a gag-order, that she would not bad-mouth the Bank, all existing cases will be withdrawn and the Bank would not admit to wrongdoing, but make the payment as a gesture).
For Moneylife Foundation, this two-year battle was won because of strong pressure from Dr Chakrabarty and support from senior executives at RBI and SEBI, who closed HSBC’s exit routes. Ms Krishnamoorthi too was willing to keep fighting and not give up, despite the many setbacks. But Ms Krishnamoorthi is certainly not the only victim of banks. In fact, there are many in India and abroad. But, as this timeline shows, it is a tough and uphill battle against large financial institutions. The battle can become easier, if other victims get together to consider class action. In our experience, not everybody has the stamina to fight their battles—if they cannot dump their problem on someone else, people get reconciled to their loss and simply turn more cynical.
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]
The new government may take months before the roadblocks to resume full-scale production
We had recently covered various issues relating to the coal production in the country and the enormous difficulties that the exclusive monopolistic producer, Coal India, faces in its day to day activities. For the fiscal year 2013-14, we have been advised, from time to time, by the coal India and the ministry of coal that we should be able to achieve the target production of 482 million tonnes.
No doubt, one the impediments, in the production, came through the cyclone, Phalin, which not only disrupted actual mining activities, but left a number of mines flooded. There is nothing one can do against nature's fury.
Coal imports directly and on behalf of clients from international suppliers, at higher prices, have also come in, but these faced unexpected problems as a result of weak rupee. Imports became costlier than projected earlier!
On the top of these, as though they were not enough headaches, power generators also did not lift the ordered cargo, in addition to which, as usual, we had problems relating to transport clogs at pit heads! What more can you ask? Railways' supply of wagons, delays in the completion of dedicated corridors etc have put a tremendous strain on CIL.
Actually, the last fiscal production was 452 million tonnes and the supplies have just grown by a meagre 2% to reach 462 mt, thus falling short of the target of 482 mt
It may be remembered that one major problem relating to the caloric value with supplies effected to NTPC, and which caused the later to hold up payments, got resolved only recently with mutual consent.
Now it is only less than a week away for the elections to commence and no major decision can be taken till the results are announced, which are scheduled by the end of May.
So, everything will be at a standstill; it will probably take a week or ten days more after the new government takes over when major decisions on all these pending issues will be taken, including the reallocation of coal blocks; whether the status quo for CIL would be maintained or new direction given!
This is a crucial time for the country in every way. It can be only hoped that those officials in charge of mines (collieries) in the country do their very best so that the wheels of the nation can move smoothly.
Chinese currency Yuan or Remminbi has been rock solid until recently. This created carry trade of faking of exports, getting in foreign exchange and buying a rising renminbi. Now that the Chinese currency has dropped what happens?
There was one major emerging market currency that was not affected by the announcement of the taper last year. The Chinese renminbi also know as the yuan has never been affected by any move of the US Federal Reserve because it is not fully convertible. It is a creature of the People’s Bank of China (PBOC). While it does fluctuate, the PBOC has let it appreciate steadily since October 2010. That all changed in the middle of February.
Since interest rates in China are higher than other places and the renminbi has been appreciating for over three years, the currency was perfect for a carry trade. Even with all the restrictions, traders managed to buy renminbi and sell dollars. The trade was so large it was distorting Chinese trade figures. In January 2013 China’s exports surged 25%. In the most recent data they suffered a large drop, 18%, the largest in two years. The reason for the distortion has to do with over-reporting of exports in order to bring in more foreign exchange and take advantage of the rising renminbi. Faking invoices to take advantage of what was seen as a one way bet was a national pastime.
Starting in February the renminbi started to drop. It has fallen 2.8% against the dollar before recovering a bit. The general hypothesis is that the PBOC was trying to drive out speculators. Apparently they were successful. It is estimated that there were roughly $150 billion foreign exchange positions betting on the Yuan’s rise at the beginning of February. If the currency fell to about Rmb 6.20 to the US dollar the betters would be exposed to unlimited leveraged losses. It is now trading at 6.21.
Another view is that the PBOC is also trying to manipulate its currency to encourage exports. In theory the Chinese are trying to reposition their economy. They want it to be more dependent on local consumption and not so reliant on exports. But after 20 years it is hard to shut down the export machine. The rise in the renminbi certainly has not helped exports. The fall in exports has certainly not helped since the Chinese economy is already slowing.
It is also a problem that China and other Asian countries are having with their trading partners specifically Japan. Abenomics is the Japanese Prime Minister Abe’s plan to revive the Japanese economy. The most obvious part has been the flooding ofthe Japanese economy with yen, a Japanese version of quantitative easing, though QE on steroids.
The policy has been successful in driving down the yen by 20% since the program started in the fall of 2012. While it has increased profits of Japanese exports the main goal of increasing inflation has been due mainly to higher energy costs. There has also been a cost to other Asian neighbors like Korea, whose exports and even national dish, Kimichi, have been affected.
While last year the yen was the worst performing currency, more recently has been rising. Political uncertainty has increased the yen’s attraction as a safe haven. So despite the best efforts of the Bank of Japan the yen has risen 3.6% against the dollar.
So speculators in the yuan are not the only ones feeling the pain. The most popular and stable trade last year was to short the Aussie dollar, short the yen and go long on China, but all that is now history. Betting on the whims of central banks can be a costly mistake, but with central banks manipulating currencies on a grand scale, it is a sad necessity.
Manipulating currency can also bring about currency wars. The main grumbler is the US. Last October in a report to Congress, the US Treasury Department wagged its finger at China by criticizing its currency intervention. Even though the yuan at that time was at a three year high, the Americans maintained that it would still need a “substantial” appreciation to be near market rates. Since then the yuan has fallen 2% against the dollar. US legislators are proposing sanctions against China.
Of course they are ignoring the fact that the Federal Reserve with its $4 trillion balance sheet and quantitative easing was very successful in manipulating the US dollar by driving it down relative to other currencies. Nor did they mention the problems caused by the program to other emerging markets and the potential havoc that may occur as the program is tapered. So far the taper has ‘only’ wiped 15% off the Indian rupee and 20% off the Indonesian rupiah.
Currency manipulation by central banks appears to be a seductively easy method to stimulate growth. Just flood your economy with trillions, depreciate your currency and your exports have an unbeatable competitive advantage. This growth can be achieved without the messy politically difficult process of real reform. They just add a few zeros to their balance sheets and off they go.
But there are several major problems to this gambit. The first is that other countries can and do play the same game. Uncoordinated currency manipulation can be harmful to everyone. But the real problem is that any monetary program eventually has to stop. It is at that point that the markets take over and we find out the real consequences, which are often far worse than the issues the policies were meant to solve.