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.