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In a welcome move, the capital markets regulator has once again stepped into the regulatory turf of another watchdog in the interest of consumer protection. On 1 November, the Securities and Exchange Board of India (Sebi) sent a show cause notice to HSBC Bank (regulated by the Reserve Bank of India, or RBI) in the Suchitra Krishnamoorthi versus HSBC case with a hard message—answer this notice or Sebi will pass orders against the bank to disgorge the money it earned as commission from Krishnamoorthi. Sebi has also threatened to stop all mutual funds (MF) from using HSBC as a distributor and ban the bank from the securities market.

The story so far: Krishnamoorthi, actor, singer and author of the fresh release Drama Queen, sued HSBC Bank last year for mis-selling unsuitable MFs and churning her portfolio to milk commissions. It is well-known anecdotally that banks mis-sell financial products manufactured by entities that come under non-bank regulators such as Sebi and Insurance Regulatory and Development Authority (Irda). Consumer complaints to banks follow the familiar loop of no reply, transfer of responsibility to the investor by saying, “You bought the product, you should have known better." Then they say, “The person who sold you the product is no longer with us, what can we do?" And then, finally, go complain to Sebi or Irda, because as a bank we are not responsible for what we sell. Given the status of the RBI in the regulatory pantheon, younger regulators have been iffy about stepping on the banking regulator’s toes. And so the story has gone on.

This is the second time that Sebi has stepped visibly on the turf of another regulator. Regulator watchers remember the time almost four years ago when C.B. Bhave, the then chairman of Sebi, asked 14 insurance companies to stop selling unit-linked insurance plans (Ulips) since they were nothing but a collective investment scheme under the garb of an insurance policy. The resulting media and finance ministry attention possibly cost Bhave his second term, but also forced the insurance regulator to issue guidelines to clean up the toxic Ulips. Sebi’s role in getting the insurance regulator to clean up its own house has largely gone unacknowledged.

Sebi’s latest show cause notice cites the violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. HSBC acknowledged that it has received the notice but refused to comment further on the matter. “Sebi has already found them guilty and asked them to pay the commissions they earned on my portfolio," Krishnamoorthi wrote in a reply to my emailed question asking what compensation should be given if HSBC is indeed found guilty by Sebi. “Besides, HSBC has lost my portfolio money to the tune of 2.11 crore. This was five years ago. 2.11 crore five years ago is worth at least 7 crore today, if not more. Add mental anguish and lawyer fees, and it is much more."

Selling unsuitable financial products to customers has been under regulatory crosshairs the world over. The most proactive regulator sits in the UK and has overseen the payouts of billions of pounds for just one insurance product (payment protection insurance, or PPI) that was mis-sold by banks and credit card companies.

“Banks and credit card companies in the UK have paid out approximately £12 billion in PPI compensation and are paying it out at the rate of around £450 million a month—a kind of small scale, private QE (quantitative easing)! In total they have set aside close on £20 billion, including administration costs which can be high," says Paul Lewis, author, freelance journalist and presenter of BBC’s personal finance show Money Box and an authority on issues around money.“People who feel they were mis-sold have to claim and explain why but there are websites which help with that process, for example, www.which.co.uk/ppi. Claims are assessed but as long as the person had PPI and uses the right phrases, payment is fairly automatic."

What would I like to see? RBI steps in to back Sebi and a sensible investigation of the selling practices of banks is undertaken. It would help if the insurance regulator joined hands with this because a bulk of the mis-selling is in the insurance space and funds are a tiny part of the problem. Compensation and fines be paid out by the banks, not just to people who have the wherewithal to fight a legal battle, but all those who come forward with stories of mis-selling and churning, if not outright fraud. The regulators must use this case to begin a clean-up in the sales practices of bank branches when they sell non-banking products.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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