While it does not make much sense to have a free look-up period for products such as NSC, PPF and other deposits schemes supported by the government, the introduction of a free look-up period in case of variable return and high-fee products makes sense
I recently received an email from a New Delhi-based senior citizen aged 78. The email describes how a private sector bank allegedly mis-sold him a fixed maturity plan of DWS Mutual Fund. As per the mail written by the investor he was made to invest in Rs4 lakh in “DWS Hybrid Fixed Term Fund Series 10 Growth”. The investor in his mail writes, “The bank manager, suo moto, had visited my residence and misguided me. I signed the cheque in the name of DWS. I was explained that this means Development of Wealth Scheme, rest of the name as well as other particulars in the form was completed by the bank”. He does not want to remain invested in this scheme as he wants his money back. Though the incidence of mis-selling cannot be established based on the mail alone, this case raises some serious issues which need a solution.
The problem in this case is not that the scheme has lock-in period of five years. The problem is that of liquidity. The KIM of the scheme states, “No redemption/ repurchase of units shall be allowed prior to the maturity of the scheme. Investors wishing to exit may do so through stock exchange mode”. It is very obvious that stock exchanges offer very limited liquidity and market depth and trading is not done frequently in various schemes of mutual funds. While mutual funds do list their schemes on stock exchange, they cannot ensure trading. Liquidity remains elusive in these schemes and investors have no or very limited option of redeeming these units, in spite of a token exit option being given to them.
While establishing cases of mis-selling may not be very easy and I do not have sufficient evidence to establish whether it is a case of mis-selling or not, the incident has definitely made me think. How can investors be protected against mis-selling, especially when an investment product has a lock-in period and an impractical exit route? Even if there is a volume in some mutual fund units, how will a gullible investor take the route of opening a demat account and trading account to sell the otherwise illiquid investment product.
In my opinion, the solution lies in introducing a “free look-up period” in all mutual fund products with a lock-in period. Plans such as the fixed term plans, recently introduced RGESS (Rajiv Gandhi Equity Saving Scheme), have lock-in periods and cannot be directly redeemed with the mutual fund. These investment products earn a huge fee for distributors and hence there is the possibility of mis-selling. Since investors, especially those who can be easily made victims of mis-selling, may find their money locked for considerable period of time, it makes sense to provide some kind of protection mechanism to investors. Considering that this problem may be faced by many investors, there should be at least 15 days’ free look-up period in case of all such investment products.
While it does not make much sense to have a free look-up period for products such as NSC, PPF and other deposits schemes supported by the government, introduction of a free look-up period in the case of variable return and high fee paid products make sense. The modalities for a free look-up period can be worked out by the regulator in consultation with the fund house and AMFI (Association of Mutual Funds in India). Till financial literacy isn’t prevalent, providing legal support to investors to reduce incidences of mis-selling is the need of the hour.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
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could you please highlight the name of the private bank and the specific branch manager and the branch name who did this type of cheap work with the so loyal investor of yours, so that rest of the people/banker get a good lesson by taking action against them.
hope you have that much of courage to come of with all the evidence in this open forum and help the regulator to take proper step.
I have also a good faith on the moneylife team that they will must help you.
If you have not such courage and confidence in you then stop posting your bad ideas by blaming the distributor.
Waiting for your reply..........
Let me clarify the following things to you:
1) The investor happened to write an email to me as he got access to my email id from public forum. He is not a loyal investor of mine.
2) Details of the case are already shared with Money Life team. This includes bank name and branch.
3) Regulator has also been informed about this case by the investor already.
4) The objective of this article is to discuss should changes be made in the existing system to protect interests of gullible investors.
Regards
Vivek Sharma
RGESS had opened up a massive passback mode in selling. There was a virtual competition amongst distributors as to who could give more passback/kickback. The average rate of passback was 60% and in some cases as high as 80% depending upon the cheque value. SEBI should peg the brokerage to 1% in the next series.
There are two types are investors. One whose financial knowledge is good enough. Other who are ill equipped in financial knowledge.
For the former category, they generally do not need a lookup period. They do their research.
For the latter category, they learn their lesson after burning their fingers once.
Perhaps a questionnaire filled by the investor before buying help? Does he understand what he is doing? This questionnaire has to be preserved by the company and based on his answers only it has to be decided whether he is eligible for the product or not. This will shift the responsibility on the AMC / insurance company also.
The questionnaire can also be used to provide further counselling - attend some sessions on personal finance etc
The problem with the questionnaire is that the agent mis-selling the product will ask the client to sign at the end of the page with an assurance that he will fill remaining details.
People generally do not want to undergo paperwork. This is what has happened in the case mentioned in the article above. The investor has signed the document without understanding it.
As far as attending personal finance session is concerned, it may help.
My view is that AMC, insurers and distributors have to be in business. They have to figure out ways to manage our money whether it generates returns or not. They are ready to pounce on our money at every opportunity.
Instead we should develop a model where insurance is indeed a matter of solicitation and investments are made indeed based on suitability. By having a questionnaire, it is the responsibility of the AMC / insurer to judge. They can be held responsible for misselling.
This also means that questionnaire is in a common format (and is meaningful) defined by IRDA/SEBI.
The problem is closed ended schemes & Huge commissions offered for procuring in closed ended schemes.
Thus the solution lies in:
1) Restricting procurement commission, (say not more than 2% or thereabouts)
2) Restricting the amount which can be invested in a Tax saving scheme
2) abolishing all closed ended schemes ( mutual funds anyway are supposed to offer anytime liquidity)
Simple solutions are difficult to be found when you put fourteen people around the table
I think there is not a simple answer to this question. Any solution that we propose, the greedy will find a way around it. For example if we make commission in life insurance as a percentage of sum insured instead of the annual premium - to avoid misselling ULIPs and traditional policies, agents might get you over insured.
For now the only remedy that I can think of is investor education / awareness.
Mis-selling can end, if there are strong deterrents in place.
Any breach of client's trust must be dealt with swiftly and attract harsh punishments.
However, mis-selling is not the only reason why investors lose.
Though not many are keen on a objective & honest introspection.
Very few have the temperament of a true investor.
Most are only too eager to make more money than they deserve or are entitled to (& that too in quick time).
When will those who fling money mindlessly, start taking responsibility for their own actions?
Can the writer of this nice piece pl adv the name of the private bank.
Rgds
Suektu