I cannot forget the conversation with the chief of a newly born asset management company. The year was 2008. The world as the West knew it was collapsing. And this CEO’s US-based parent company, bang in the middle of imploding all across the world, was on life support paid for by the US taxpayers. The CEO, forgetting that we now live in a flat world and that information is no longer the prerogative of the suits, looked me in the eye and said that despite illiterate journalists, he would be able to sell funds in India because of trust. Trust that his company name invoked. While I was still picking up the pieces that fell out laughing, the company quietly went and stood at the bottom of the assets under management line-up. The investors were, and are, not interested in dealing with a company whose parent is so mired in muck.
While the global firms can get their products into India, they must not forget that their worst, and best, practices, too, are known and how they respond to regulators is a click away. So, even before the insurance industry and foreign banks begin to protest that the contents of this column are anti-national, anti-developmental and will cause death by starvation, they should just look at what their own parent companies have been doing over the years in terms of compensation for mis-selling of financial products in countries where these companies were born. The latest to creep into the global headline space is the $725 million compensation by AIG to resolve allegations of wide-ranging fraud that were brought to court as a class action suit by three Ohio pension funds. This takes the total value of AIG settlements with stakeholders, including pensions representing firefighters, police, teachers, librarians and others, to about $1 billion.
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Not just for fraud, compensation has been given for mis-selling of retail financial products. An ongoing story comes out of the UK where the now dissolved super regulator the Financial Services Authority, or FSA, came down on insurance firms and banks that sold payment protection insurance (PPI) plans after discovering that the product had been mis-sold. A PPI is an insurance cover for a loan you take and may not pay back due to ill health or other reasons. It is usually sold as an add-on product by banks lending to retail consumers. The UK, according to Financial Reclaims Ltd (http://www.ppicompensation.me.uk), a UK-registered firm that helps consumers get compensation, has about £6 billion worth of such covers sold with half of them “mis-sold”. Mis-selling in this context meant that lenders did not communicate fully the details of the product to the consumer and did not disclose that a PPI had been bundled onto the loan.
FSA, through a mystery shopping exercise a couple of years back, discovered that the consumer complaints against the PPI were true and that the product had been mis-sold. Last year, FSA handed out fines to 22 firms totalling £8,925,000. There are interesting parallels with India’s unit-linked insurance plan (Ulip) product and PPI. Like the PPI, the Ulip product has been more mis-sold than sold fairly. Even the insurance regulator has reluctantly, and rather late, agreed that there has been mis-selling. The alteration of the rules by it in the last four months has brought about a correction in the structural faults that facilitated mis-selling. But if we all agree that this product has been mis-sold, we now need a proactive regulator to force companies and the institutional selling arms (banks and large distributors) to compensate those it has been mis-sold to. How will we decide that there is a consumer who has been mis-sold a product and is not just complaining because the market went down? In the UK, there is a checklist of about a dozen items that determines whether a consumer qualifies to seek compensation. Some of these points can be migrated to the Ulip scam experience. For example, if a consumer was led to believe that PPI was compulsory—it’s a case of mis-selling. If she was told that she would stand a greater chance of getting the loan if she took PPI—it’s a case of mis-selling. If she was not explained the exclusions within the policy and that she was pressured into buying PPI—it was mis-selling.
We can see the parallels with Ulip sales immediately. In fact, the UK has seen companies such as PPI Payback (Ppipayback.co.uk), Oasis Claims Management (Mis-sold.com), among others spring up to help consumers stake their claim.
Most of the big names in insurance and banks we see in India, have paid up in the UK. And before somebody talks of there being no precedence for this in India, we must look at the distribution of disgorged money (from the initial public offering scam) by the capital market regulator earlier this year. Compensations in the Ulip mis-selling will go a long way to establishing that the insurance regulator’s newfound teeth actually bite.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money.