Clearly many people out there are keen to see the distribution industry in India mature. The response to my last week’s column that predicted the shape of the industry over the next few years got people mailing and calling. One mail and one conversation need a wider discussion.
Ganesh Sankaran of LatentView, a consultancy firm, wrote in to say that he agreed that banks would play a bigger role in the distribution game, where they use their reach and customer bond to sell products. He says it is already happening in life insurance, where it works because consumers need one long-term product. “However, in the case of mutual funds, most customers would tend to invest in more than one fund house. Will the banks be willing to sell products across fund houses? I don’t think so. I feel pure-play distribution houses, online trading firms or the mutual funds themselves may play a bigger role in the distribution,” he wrote in an email.
The second interaction was with a friend’s wife who works as a relationship manager in a large private sector bank. This is not a happy story. As an insider, she is witness to not just mis-selling, but downright fraud, where the banking channel is using its trust, leverage and reach to dupe customers to sell unit-linked insurance policies, or Ulips. A product that gives up to Rs40 commission on every Rs100 invested in the first year is ripe for mis-selling—we know that. But this conversation showed that sharp sales practices are fast turning into fraud. She speaks of banks selling Ulips while verbally telling the customer that it is a fixed deposit they are buying. Of signatures being forged on the mandatory cost and benefit illustration. Of downright lying about policy features, where the most common is when a 15-year product is sold as a three-year product with no costs. Of bankers swapping topi stories at the end of the day—how many customers they duped today. “They just care about their targets and their bonuses. And anyway none of them would be around in the branch to handle the customers as their turnover is very high,” she says. She is afraid that more power to the banks would lead to even more fraud. While there are banks and there are banks, if this is happening in even one bank, it is cause for huge concern. While I know that over the next few years these issues will get solved, the current worry remains. Banks are largely trusted by Indians and the way insurance is being sold will not just put people off insurance, but will destroy the long history of trust that large banks enjoy in India. I’d worry hugely if I were the Reserve Bank of India.
Also Read Monika Halan’s earlier columns
Stepping back from instant outrage, if we look at the issue, we see a market that has no regulation in place to monitor who sells what to whom for what reason. The consumer interface is like the Wild West, with sellers getting away with palming off inappropriate products with no accountability. Anecdotal evidence points to the biggest culprits being some big banks. However, my view of the distribution industry does not change. Banks will be the largest distributors of retail financial products and the last column looked at just the front-end. But this front-end will collapse without a back-end under the regulatory eye that looks at all sellers of financial products with the same lens. We should be looking at a world that has a system of customer-profiling (so that a risk-averse 60-year-old is not sold a high-risk sector fund or a maid or a driver is not sold an equity Ulip) and documentation. The sales process will be documented so that there is a paper trail, with the name and registration number (think unique identification number) of the seller/adviser/planner, who sold the product or made the plan. A system of mystery shopping and unannounced audits will be in place and one to deal with consumer complaints and offer redress. So in response to Sankaran’s view, banks may sell only their own group funds, but they would need to disclose to customers that they get a restricted menu. This would work for the consumer and the seller. The seller is protected from false claims of rogue consumers who, for example, may indicate they are risk-happy and then later contest the equity fund they are sold.
Here’s a story that my financial planner friend from Australia had to tell some years ago when he worked as a certified financial planner in a large Australian bank. One of his clients refused to buy life insurance when his plan was being made. The customer died and his widow sued the bank where the friend worked, alleging wrong advice. The paper trail was opened up and the planner’s recommendation of life insurance examined. The judge ruled in the widow’s favour. Reason: the planner should have “strongly recommended” life insurance and not just recommended it. Needless to say, we’re many years away from a regulatory and judicial system that puts the consumer first.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at email@example.com