Institutions, such as banks, are the biggest perpetrators of financial
mis-selling. And this needs to be checked at the earliest

AS a child, I had heard the story of the goose that laid a golden egg every day and the greedy farmer who cut open its belly to lose all that he stood to gain. These days, it seems such practical wisdom is becoming increasingly rare. Take, for example, banks, which command great control over the way in which we manage our finances. Yet, they have continuously been moving away from their core banking activities, towards becoming financial behemoths selling an array of investment products.

In all this, the interest of the account holder has taken a back seat. Mis-selling by banks is rampant and it saddens me that it is not being checked by the Reserve Bank of India. In July, the Association of Mutual Funds of India (Amfi ) posted data on the commission income of the top distributors operating in 20 or more locations. The fi gures were interesting: not only has the commission income on sale of mutual funds gone up for the top 10 players, eight entities in the top 10 were banks.

While I don’t have any issues with banks raking in the moolah, this is the conduit through which sales have been rather dubious, to say the least. This is evident from the alarming rise in the number of complaints against mis-selling by banks. In fact, when I recently checked the data for big distributors who have lost out on commission, I found brokerages to be the biggest losers, with just one bank, State Bank of India, in the list. I also looked up for data on the distribution channel,
which accounts for most sales of insurers.

First, many banks have insurance subsidiaries in both the life and non-life space. Second, the regulator has allowed non-bank promoted insurers to form tie-ups with banks to distribute insurance products under the bancassurance model. Last year, for bank-promoted insurance companies, on average more than 50 per cent of the business was from bancassurance. For the non-bank promoted ones, it contributed 20-25 per cent. The advantages of routing business through banks are obvious. First, the cost of sale is low for the insurer. For banks, it is an extension of existing business that earns them additional income with very little effort.

In an ideal world, this would have solved the problems of underinsurance and low penetration of mutual funds. But the outcome is something else, thanks to the transaction-based approach followed by banks compared with the advisory model followed by independent agent advisors and distributors. It’s usually the agent who has little to defend himself and also take the fl ak for mis-selling. The question is: why would the agent adviser kill the golden goose? After all, for generations, the colony uncle selling insurance did so with the best of intentions, even paying premiums during emergencies and standing by his customers when they needed to foreclose policies or borrow against them. Yet, it is this class of distributors that becomes the soft target.

I am not dwelling on the Shivraj Puris of Citibank, or certain high networth individuals taking their bank relationship managers to task and getting their due. Such cases are few and far between and, besides, those who lost their shirts to these people deserved to lose. I would blame it on their greed as well. In all this, I fail to understand why RBI, Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (IRDA) have turned a blind eye to this ‘institutionalisation’ of mis-selling. A simple solution is to make bank relationship managers accountable for the sale transactions they undertake. The bank is one Goliath that a David (read: investor) alone cannot take on. Many Davids have to come together.

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