The Reserve Bank of India’s (RBI) long overdue guidelines on wealth management and distribution of financial products such as insurance policies and mutual funds by banks were uploaded on its website on 28 June. The guidelines can be accessed here: http://bit.ly/11xD6DZ and comments sent to the RBI till the end of July. The final guidelines will be released thereafter. Although RBI already has rules in place to regulate the sale of third-party products and wealth management services, these are more than 20 years old and out of sync with ground realities of how banks actually advise clients, refer and sell financial products. The new guidelines seem to be triggered by the large-scale violation of know-your-customer (KYC) and anti-money-laundering (AML) regulations by banks as exposed by Cobrapost.com in a nationwide sting (http://bit.ly/1aULAIv) that covered more than 20 banks. RBI’s internal audit showed that such violations were rampant as was mis-selling of financial products.
The guidelines aim to protect consumers against conflicted advice and mis-selling and lay down the ground rules for the distribution and advisory business of banks when they sell financial products to their customers. The good part is that words such as “suitability” have begun to finally come into the RBI lexicon. Suitability is a basic threshold regulatory need for sale and advice of retail financial products globally that makes it mandatory for the seller to ensure that the product being sold works for the customer. This means that a life insurance policy should not be sold to a retired person with no dependants. It has taken a long time for the word to be used in India. Another positive part is that the draft guidelines are in agreement with the Securities and Exchange Board of India (Sebi) Advisor Regulations (2013) (http://bit.ly/12ihnyx) and segregate the pure distribution function from advisory. Banks have to separate out the pure execution function from advisory and set up a Separately Identifiable Department or Division (SIDD) or a separate subsidiary for their wealth management, referral and portfolio management services activities. This SIDD will have to register under the Sebi Advisor Regulations. This is a step forward towards a unified regulatory face as seen by the customer.
But the bulk of the draft remains typically fuzzy and leaves a lot to the discretion of the bank to do. For example, the draft guideline says that banks have to put in place a “robust customer grievance redressal mechanism which should form part of the board approved policy”. RBI should have looked over its shoulder and seen what Sebi and the Insurance Regulatory and Development Authority have done after they found that companies do not take grievance redressal seriously. Both have put in place mechanisms where the regulator is in the loop of customer grievances (http://bit.ly/12U5KsH). Additionally, RBI needs to understand that there are generic malpractices that must be solved at the regulatory level and individuals hitting away at it will not work. For instance, RBI says that banks must not tie the sale of an insurance policy to any other banking service. Super. But the ground reality is that this practice is rampant. For the customer that complains, the bank may solve that one problem, and that too after a long chase. But the practice remains unchecked for everybody else. There is nothing in the draft guidelines that make for an industry-wide solution. For instance, why can’t one consumer complaint for tied-sales malpractice trigger the same redress all others sold policies as a tied service by the bank? RBI could learn from the UK regulator’s treatment (http://bit.ly/1ajANbw) of the payment protection insurance (PPI) redressal process where customers were encouraged by the regulator to step forward and get compensation.
The other issue is the fuzziness around penalties. The draft guidelines say that violation of instructions “may invite deterrent action against banks, which could include raising of reserve requirements, withdrawal of facility of refinance from the RBI and denial of access to money markets…”. Notice the word: may. May invite. Not “will” invite. Who can forget RBI’s denial and protection to banks after the Cobrapost sting? And even after its own investigation showed gross violations, the tiny, reluctant fines that totalled less than Rs.10 crore on three of the largest banks in India that were caught blatantly offering to launder money and violating AML and KYC norms. This leaves us and the banks in no doubt how serious the RBI is in saying that it will violations “view seriously”. There has to be a more defined approach to consumer redressal and punishment for violations for the guidelines to be taken seriously.
The banks will have a year from the time of the final guidelines to get compliant with them. So banks can carry on the mis-selling and violation of the anti-money laundering and KYC rules for some more time. And even post that, the draft guidelines have failed to spell out how the banks will be punished if caught violating the rules.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at firstname.lastname@example.org