Love for banks, but not bankers
The approach of RBI has to put the bank customer at the centre
It is still far too early to highlight wealth management services as one of the banks’ biggest risks in India. Every bank in India worth its salt—irrespective of whether a foreign bank, private sector bank or a public sector bank—has started offering a range of wealth management services right from high-end private banking services to the lowest common denominator of distributing third-party or proprietary insurance and mutual fund products. Arguably, the synergies of a branch distribution network, capability to offer standardized advisory services, privy to financial habits of customers and most importantly being the custodian of customer trust are not only compelling reasons but also places the bank in a uniquely strong position to leverage these strengths into a sustainable fee income stream from wealth management services. Strangely, banks are slowly but surely squandering away this opportunity by corroding into these very strengths.
Today almost everyone has a story to tell on how a banker sold or tried to sell an insurance policy or a mutual fund without clearly informing about the product features and the inherent risk or by plainly mis-representing the product feature or blatantly forcing the product down the customer’s wallet by making it a subtle prerequisite to sanctioning a loan or a locker. Wealth management services or investment advisory services have become pseudonyms by banks to fleece customers rather than build a strong regulated process wherein a customer will get investment advice or investment products suitable for her. The goal of the bank should be that the customer can confidently walk into any of its branch and get the same investment advisory based on his risk profile and build a strong standardized investment process based on customer suitability.
Rather than building this, banks are taking the shorter way out. Banks are building a high pressure environment for bankers—with the carrot of high incentives and monthly contests and the stick of uncertain career longevity (called “fear of god" in banker’s parlance)—to push high upfront income products to their unsuspecting customers. The focus is not the need of the customer but the monthly incentive for the banker and fee income for the bank. This misplaced short-term focus of the banks is leading one to hear increasing stories of a 65-year-old buying a 15-year insurance policy thinking that he just put his money in a superior fixed deposit at his bank.
The buzz of mis-selling is getting louder but the Reserve Bank of India (RBI) continues to see this through Nelson’s eye. The view of RBI remains, or so it seems, that each of the third-party products and the associated sales processes are regulated by their individual respective regulators—Securities and Exchange Board of India (Sebi) and Insurance Regulatory Development Authority (Irda). Not to say that there are no regulations by Sebi and Irda but the inability or unwillingness of regulators to step into each other’s guarded turfs is giving banker’s a free run on the customer’s wallet. That inspite of numerous complaints of mis-selling of insurance and mutual funds, neither Irda nor Sebi has penalized any bank for mis-selling is just a simple case in point. And hence the ball lies squarely in the court of RBI and it needs to own up the responsibility that these are banks’ customers and RBI is the regulator for any sales processes conducted by banks irrespective of what product they sell. The approach of RBI has to put the bank customer at the centre so that she does not fall in the cracks between the regulators which is currently happening.
There have been calls for reform before, and after all this time, the status quo reigns supreme. In June 2013, RBI had placed draft wealth management guidelines in the public domain with an intent to implement them by August 2013. These draft guidelines saw some very spirited discussions and feedback to RBI from many, including me, but was nothing short of being a waste of time and effort. These guidelines are now put on the back-burner and are gathering dust is well accepted and have the bankers smiling and continuing with their free run. Bankers, on the other hand, strongly protest to any hint of mis-selling towards the detriment of customer needs. Banks showcase that in spite of negligible guidelines or regulations toward third-party product sales, they have strong internal compliances and checks so that no customer is short-changed. So the shrillness continues with no one being any wiser about it.
Aptly I quote RBI governor Raghuram Rajan, “Our distaste for the banker must not be allowed to destroy the bank." He wrote this in his column “Love the bank, hate the banker" (https://bit.ly/LovetheBank).
Manoj Nagpal is chief executive officer, Outlook Asia Capital, a consulting and wealth management firm.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!