Stop Mis-selling, Protect White Money from Being Looted
Last week, I caught up with Deepak Parekh, chairman of the Housing Development Finance Corporation (HDFC), who is known for his wise counsel and for taking the lead in flagging policy issues that most industrialists are hesitant to raise. We had met Mr Parekh to seek his guidance on how to push the government to frame basic guidelines for retirement homes. A study conducted by Moneylife Foundation underlined this to be an important market segment, but the government needs to put in place a regulatory framework to protect the rights and safety of elders. 
 
Mr Parekh surprised us by going on to discuss the mis-selling of mutual fund (MF) schemes and insurance policies by banks including the continued practice of offering foreign junkets as incentives to agents and distributors. This is an issue that Moneylife has been campaigning against for years! Mr Parekh said that he had discussed his concerns with all three financial regulators—governor RBI (Reserve Bank of India), chairman SEBI (Securities & Exchange Board of India) and chairman IRDAI (Insurance Regulatory & Development Authority of India). Another surprise!
 
He raised two key issues. First, MF industry’s practice of pampering distributors through foreign junkets which are passed off as education trips. The lure of these trips to select performers decides which scheme is sold to the customer, rather than the suitability of products or performance of fund houses. The second issue is mis-selling of insurance products (especially the sale of insurance as single-premium policies to senior citizens). When we pointed out that banks are the biggest culprits in such sales tactics, he readily agreed and said that his group (bank, mutual fund and insurance) was just as responsible as other financial sector biggies. That is why he wanted regulators to initiate a clean-up. I am sure, many will react to Mr Parekh’s comments with scepticism. 
 
Coincidentally, Ajit Dayal, until recently the head of Quantum Mutual Fund, has already lashed out at what he calls the decline in HDFC’s ‘ethical and transparent standards’ in his newsletter called The Honest Truth. Mr Dayal wrote, “HDFC Mutual Fund was party to the persistence (sic) survival of a scandalously profitable distribution mechanism for mutual funds. Commissions paid to distributors were never disclosed. Worse, rewards were given to distributors for selling the most products within a timeframe. Greed was effectively encouraged. The fact that this was the standard in the industry is no excuse - for the subsidiary of an HT Parekh created firm.” He is especially riled at the directors of HDFC Bank and the HDFC Mutual Fund for their acquiescence through silence which encouraged a policy of enhancing AUM (assets under management) at any cost. He expects the inheritors of HT Parekh’s legacy to lead the activism to “clean up messy practices in the distribution system.” 
 
Mr Dayal, probably, has the right to criticise because Quantum Asset Management led by example and kept away from distributors. But, like us at Moneylife (we say no to native advertising and advertiser-driven ‘content’), he has had to sacrifice growth for ethics. Is it realistic to expect the industry to take on an activist role? Shouldn’t Mr Dayal’s ire be targeted at the government and its multiple financial regulators whose primary duty is to protect investor interest through sensible regulation and strict supervision? Ajit Dayal takes credit for regulatory changes that broke the stranglehold of distributors on the MF industry; but Quantum’s policy of doing away with distributors hasn’t met with thundering success either.  
 
Mr Parekh’s initiative of raising the issue of mis-selling with the regulators is important. The huge gush of money into MFs has set the stage for the industry to voluntarily end the dubious inducements to bank employees and distributors to sell unsuitable schemes. What we need is a big shove in the right direction from the financial regulators to end malpractices. Will they act, now that an industry stalwart is asking for a clean-up? Let’s look at where we stand with each regulator. 
  • RBI has been the most hypocritical, so far. In February 2016, Raghuram Rajan said that he had warned banks of regulatory action for ‘mis-selling’ of third-party products like insurance. RBI did nothing of that sort. It asked the Indian Banks Association (IBA) to come out with an appropriate industry policy regarding the sale of third-party products. IBA operates like a cartel and will not do anything until pushed.
  • Dr Rajan also came up with a cosmetic Consumer Charter (which it now admits will never have teeth, but only articulate guiding principles). Secondly, he said banks would have an internal ombudsman (IO) to hear consumer complaints. Details about IOs are hard to find on bank websites, although RBI says (in response to an RTI application) that all banks have created these positions. Their role and responsibility is also not known. Thirdly, on the eve of his departure, Dr Rajan launched sachet.rbi.org.in, which is a grievance filing mechanism for all financial regulators. The website is not even updated regularly, apart from occasional, inconsequential additions to some sections.
  • In 2016, RBI had also said that it wanted the Financial Stability and Development Council (FSDC) to initiate action against mis-selling by banks. But it wants other regulators to raise the issue. This remains its position even under governor Urjit Patel. The only positive action on this front came in July 2017, following Moneylife Foundation’s public campaign when RBI allowed complaints against insurance mis-selling to be heard by the banking ombudsman.
  • In July 2016, the media reported that the insurance regulator was actively planning to ban incentives to bank staff—insurers would only be allowed a commission. It has not happened. 
  • As for the MF industry, fund houses offer quarterly incentives for select schemes and junkets for selling specific schemes in a given timeframe that helps their internal AUM targets. What is good for the investor or suitable for her profile is, usually, not in the equation. 
 

If  FSDC decides to follow the path taken by the UK regulator, mis-selling can be stopped very quickly. In the UK, banks, such has Lloyds, Barclays, HSBC, RBS, etc, have been forced to pay up close to £40 billion for mis-selling insurance, writes Financial Times. They are likely to cough up another £500 million before August 2019, says The Times UK. At the very least, a start must be made to stop the most egregious targeting of senior citizens. If insurance companies are asked to file information on all life policies, other than term insurance, sold to people over 60, the government would have a quick database of potential mis-selling. Cross-checking this with all complaints filed by senior citizens, with the banking ombudsman or the nodal officers of all banks, will probably identify cases of mis-selling with 90% accuracy. 
 
If the regulator orders a refund of premium paid in all these cases with interest and imposes exemplary damages on them, it will end the practice fast enough. The clean-up needs to start at insurance but cannot stop there. Mis-selling by banks extends far beyond insurance (the most egregious) and mutual funds. Moneylife had seen cases where relationship managers have opened unwanted brokerage accounts for customers, by reusing KYC documents, because they earn an incentive from the bank. Bank officials actively accost customers and offer personal loans, by quoting absurdly low interest rates through misrepresentation. A blogger writes about how he was tempted by a personal loan offered at 7.9%; but his own calculations showed that the lady was quoting a simple interest, while the actual payment, at compounded interest, worked out to 14%. There is plenty more.
 
This government has promised us all kinds of crackdowns. With less than two years to the next general election, it is time it begins to protect people who believed its promises. While an attack on black money is laudable, stringent action to protect hard-earned, tax-paid money is what the middle-class will really appreciate. 
Comments
Sunil Rebello
4 years ago
OPEN LETTER TO Mr. Deepak Parekh
Dear Sir,
ALL FACTS BELOW:
I had bought 2 Insurance / Investment policies for my 2 daughters in 2015 and paid a Lakh each – Total 2 (Two) Lakhs. Reference Nos. 18001462 & 18001434
I later found out that the returns are negligible and therefore discontinued the same.
This had informed in writing to HDFC Life and I have the copy / receipt of the 2 letters dated 22-06-2016
Till date (including yesterday) I receive 2 to 3 calls a day to reactivate the 2 Insurance / Investment policies.
SIR – I (A RETIRED SENIOR CITIZEN) HAVE TAKEN A LOSS OF Rs. 2 Lakhs (Rs. 2,00,000/-), due to your employees miss-selling a HDFC Life product.
BUT CANNOT YOU GIVE ME PEACE OF MIND AND NOT KEEP ON CALLING ME FROM DIFFERENT NUMBERS TO REACTIVATE THE INSURANCE / INVESTMENT POLICIES.
Your companies require more ‘ethical and transparent standards’.
Please revert
SUNIL REBELLO
[email protected]
Mobile 9820375190
Chandragupta Acharya
4 years ago
I would request Mr. Parekh to look inwards first, and stop looting floating rate home loan borrowers. I have witnessed many instances of HDFC bluntly refusing new customer rate to existing borrowers, in clear violation of NHB guidelines. Just exploiting the inability and / or unwillingness of the people to take recourse to legal remedies and fight the system.
Shrikrishna Bhat
4 years ago
I am quite surprised...i cam show two examples of a bank selling retirement plan to a person aged 59. because her husband was a businessmen and eanted a jenuine loan..now u tell me what u will say ro the bank ? complaining to irda foe misselljng doesnot solve ..

second case is for getting a locker in a schedule co op bank..he was compelled to buy 10 year life(name unfortunately of the same bank as case 1 ).

in sucha case only saying bank shld not miss sale is a eye wash by the director of the same bank..
Anil Mehta
4 years ago
All frontline pvt banks doing 90 % missalling insurance to thair customers.
managment know very well but thay want only profit ..they able to gain profit via employee haressment ...
Suketu Shah
4 years ago
Clean yr house first Mr Parekh ie HDFC Bank wealth management before making comments on the entire industry.
Sanjay Khandkar
4 years ago
This is a very serious issue where I have heard of stories of people who have lost their entire life's savings. As everyone knows people have a tendency to "trust" banks and therefore they fall into lure of products sold by banks. I guess this is a reason that this practice is rampant. I have also seen how bank employees divert customers into totally un-needed products when they visit the bank for mundane activities such as updating their passbook.

This is nothing short of organized thievery and the industry has become immune to the plight of the people by enriching themselves at their expense. No matter what the fund earns, the fund house or the insurer always wins!

Unfortunately I do not see anyone other Moneylife to raise this issue. Somehow in our country communalism or issues related to it are more important than the life's savings of people.

Of course we can say that buyers beware. However, this is a huge difference when a buyer unknowingly buys a product as against him buying it after being bombarded by banks who are like sharks looking for preys.
Anil Mehta
Replied to Sanjay Khandkar comment 4 years ago
agreed sir

type in you tube insurance missalling you will found thousands of video
SuchindranathAiyerS
4 years ago
India transformed into a Nation of thieves in 1947. This is amply demonstrated by the daily acts of Government employees and the Judiciary. But, since large swathes of Banking became Government since 1969, Financial Services and Banking in the country have integrated with Government. Substantially if not fully:
Ramesh Poapt
4 years ago
bubble/scam is likely to burst as soon as the a big crash occurs,
sooner or later....back swan in the making....
sohan modak
4 years ago
That much Raghuram Rajan's double talk !
Subba Rao
4 years ago
It is a little ironical that someone of Mr.Parekh's stature has to look at the regulators to put an end to mis-selling while agreeing that his group companies may also be indulging in unsavoury practices. Why does his group need the regulator to define the Do's - and - Dont's. I have been a customer of HDFC Bank for 20 yrs now and when I applied for a Safety Locker in a Mumbai branch, I was told that a locker could be provided on an expeditious basis (in spite of they claiming that there was a long waiting list for the same) if I were to buy an Insurance policy with a 1 lac annual premium or so !!! It is a widely known "secret" that most of the financial products in our country are pushed - especially Insurance and MF products. The sad fact is that the regulators make the mandatory noises of righteousness and then it is business as usual. There is a catch though. The regulators are also indirectly responsible for the growth of the industries that they regulate and hence may shirk away from acting on mis-selling lest it hurts the growth of the business - namely topline. Most AMCs and Insurance companies run sales contests for their distributors (banks included) and take the winners of the contest on trips to exotic foreign locations. And these trips are camouflaged as offshore "training" sessions or a visit to the Insurance company's foreign partner's offices there . It is high time that while they are given credit for the growth of the industry that they oversee they are handed out bigger did-credit for the health of the business that is being generated.
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