RBI reviewing guidelines on mis-selling by banks in wealth management services
Moneylife Digital Team 09 July 2013

The Financial Stability Report released by RBI has taken note of mis-selling in the wealth management division of banks. An issue which has been constantly been highlighted by Moneylife, needs to curbed with many checks and disclosures in place

Taking serious note of the mis-selling that occurs in wealth management and investment advisory services offered by banks, the Reserve Bank of India (RBI)'s Financial Stability Report released on 27 June 2013 says that it is in the process of reviewing its guidelines.


The RBI in its report says, “Grievances relating to mis-selling, whereby products that are unsuitable for a particular customer, either for commission-linked reasons or lack of knowledge, clarity regarding accountability between the product issuer and the advisor/portfolio manager, need to be addressed by improving consumer protection measures.”


It further says, “The issues have been widely debated in the inter-regulatory technical group of the FSDC Sub Committee and a review of the extant guidelines on wealth management services offered by banks is being carried out. The aspects on marketing and distribution of third party financial products by banks also need to be factored in while issuing comprehensive guidelines on Wealth Management Services by banks.”


Moneylife has for long been highlighting the mis-selling of these services with specific examples. However, the RBI had not responded until now. 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 & 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). The case remains unresolved, with the bank brazenly continuing to blame Ms Krishnamoorthi for having signed papers.


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. He too is in India and doing the rounds of all the regulators in the past week to try and figure out who will own up to the responsibility of regulating HSBC.

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)


Unfortunately, in several such cases, banks tend to get away scot free because the consumer is conned into signing a number of documents based on misplaced trust in their bankers. For instance, when Mr Sharma approached the Banking Ombudsman for justice, his case was rejected because he had signed on the investment form. As per existing policy, the Banking Ombudsman would not get into the merits of an obviously wrong product, with a five-year lock-in product being sold to a 79-year old senior citizen. Similarly, when Ms Krishnamoorthi took her issue up with the Ombudsman, the bank replied stating that she had signed on all the letter of instructions (LoIs) to carry out the transactions in her account. The manner in which bank officials discharge their fiduciary duties was not even taken into account.

The RBI Financial Stability Report also mentions 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.” When SEBI had come up with the draft regulations in September 2011, we had mentioned that this idea of SEBI is nonsensical. (Read: Investment Advisor Regulation - II: How SEBI’s do-gooding can be easily undermined) How far this move would be effect we do not know as customers are after all known to sign on blank forms and signing without reading.


Reported by Jason Monteiro

ramanathan dwarakanathan
1 decade ago
It is also the greed of the investor for higher returns that makes thing worse.
nagesh kini
1 decade ago
Banks have no business to be in the so-called trade of Wealth Management that is certainly not their cup of tea by any stretch of imagination.
Commercial Banks ought to stick to their core competence of accepting deposits and advancing loans and earning decent spreads.
Peddling third party products like MF, Insurance and Gold has never been their forte, they are neither trained or geared to dabble into them.Other than indulging in glib sales talk that lack depth of knowledge, they fail woefully in rendering post-sale services of expediting MF redemption or settling life and general insurance claim - they pass them on to their 'back office' that is an impersonal set up.
The staff of private bank branches know nothing of advances and monitoring them. Though it is the Branch that is in day-to-day with the customer, yet they are in the dark about documentation and follow up. This is the beginning of incipient NPAs!
More Cobrapost exposes will bring out the rot in advances.
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