Last week just as my Twitter feeds got active with links to the British Lloyds Banking Group blinking in its fight with the regulator, the Financial Services Authority (FSA), and agreeing to a £3.2 billion (Rs 23,427 crore) provision to meet insurance mis-selling claims, we at Mint were following the PricewaterhouseCoopers story. Mint reported that while global investors (including pension funds from the US, the UK, Norway and Denmark) in Satyam were to be compensated by the auditor found guilty of not following basic rules of an audit, Indian investors will get not a paisa (http://bit.ly/j9Zbg2). The Indian story was about a lack of clear regulatory jurisdiction, archaic laws and the inability to take tough decisions against large corporations. The British story was about consumer agencies active enough to push the regulator into action, the legal system providing the platform to do this and the institutional will to actually go ahead with a decision to punish that will make markets fall.
Also read | Monika Halan’s earlier columns
In 2007, the UK’s FSA, pushed by consumer groups, charged banks with mis-selling an insurance product called Payment Protection Insurance (PPI). FSA had used a mystery shopping exercise (something that any regulator in India can use, should it choose to do so) to discover that the PPI was indeed mis-sold. FSA found that though the PPI’s main aim was to cover loan repayments if the borrower’s income stopped due to ill health or unemployment over the period of the loan, it was being sold to the retired, those already unemployed and those with existing medical conditions without disclosing that the cover was useless to them. The FSA found that by bundling the insurance into the loan, banks were effectively charging for a product that the customer did not know she was buying or was buying not fully understanding the product. Estimates put the total PPI cover sold at close to £6 billion. In 2010, FSA fined 22 firms £8.9 million to compensate PPI victims who had complained. But the regulator did not stop there. It drew up guidelines to get the banks to contact all past PPI customers (banks have the database, right?) and invite them to complain if they thought they had been mis-sold the product so that they could be compensated! Sounds unbelievable that in India that a regulator would ever do that. Of course, the banks challenged it and went to court. In April 2011 a high court ruling rejected the challenge and it was expected that the banks would take the case higher. But in a surprising retreat, instead of contesting the verdict, the banks, led by Lloyds, accepted the FSA directive last week. Lloyds was the first to do so and has set aside £3.2 billion to meet the PPI claims. Barclays Bank will reserve £1 billion and its chief Bob Diamond apologized to customers saying: “We don’t always get things right for our customers; when we get them wrong, we apologize and put them right.” Royal Bank of Scotland will not appeal the case but has not said what provision it will make for mis-sold PPI, while HSBC has made a provision of $440 million. A total of three million customers will benefit from this high court ruling and get paid around £2,000 each as compensation.
Graphic by Shyamal Banerjee/Mint
Not only were bank stocks down due to this hit on the bottomline, but the news dragged down global indices where the banking stocks were listed. The logic is clear—if you make an error, the penalty should be a deterrent to repeating the action that caused harm. Cut to India. There has been no large-ticket refund of investor money, other than one case fought by Midas Touch Investors’ Association that got Rs 975 crore back for investors in a guaranteed fund from Canbank Mutual Fund that did not keep the guarantee. The reasons are many—tangled regulatory turfs, fuzzy laws that make pinning down responsibility almost impossible, a regulatory framework that is happier targeting front-level junior employees rather than the firm, its directors and management and an overall reluctance to use financial penalties of any consequence to punish wrongdoing. In the rare case of enough evidence being found, the penalty is something that firms smirk at in private. How a fine of Rs 5-15 lakh (the penalty imposed by the Indian banking regulator on banks found guilty of selling complicated derivative products to companies) will hurt a bank with a net profit figure that reads like a telephone number is a question not worth answering. Regulatory action when the firm under investigation has been found guilty has to be twin-pronged. One, make good the loss to consumers who were mis-sold financial products. Two, impose a cost on the perpetrators of the crime such that there is internal pressure not to be caught with their paws in the customer’s wallet again. But first, of course, the battle in India is to even admit that there is a problem of mis-selling by banks.
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 can be reached at firstname.lastname@example.org