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Business News/ Opinion / RBI: Just good intent isn’t enough to treat customers fairly
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RBI: Just good intent isn’t enough to treat customers fairly

RBI has seen its role as preventing a bank from failing, to keep depositors' money safe

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The Reserve Bank on India’s (RBI) report on Trend and Progress of Banking in India 2012-13 released on 21 November has a small section that says the central bank is considering extending the Treating Customers Fairly (TCF) policy from just banking products to third-party products such as mutual funds, capital market and insurance products sold by banks. (You can read the report here: https://bit.ly/17VkG3o). It draws upon the TCF policy of the UK regulator, variants of which are now being used in many countries such as South Africa, New Zealand, Singapore and Australia. The UK’s apex regulator, the Financial Conduct Authority (FCA), has six core consumer outcomes that it wants TCF to achieve. One, consumers are sure that the company they deal with is fair to them—for example, a fair lender will let floating rate home loans float down when interest rates fall and not keep them artificially high by cheating on benchmarks. Two, products and services produced, advised on and sold are constructed to solve customer problems. Three, consumers get clear information and are kept informed before, during and after the point of sale. Four, financial advice is suitable. Five, products sold do what consumers were promised they will do. Six, switching from and complaining about a sold product should not be a clunky process.

The TCF’s goal is to change the mindset of the businesses so that the top management builds its business around the principles of customer fairness. As the UK found out, TCF is not enough – guiding principles and moral positions have little space in the boardroom or in the corner office where the bottom-line and the analyst-watched quarterly target are the real drivers. In addition to setting out the guiding principles on how it wants businesses to think about their customers, FCA has used both a change in the incentive structure in the sale and advice of retail finance products by moving over to a no-load product market, as well as punitive measures that hurt the bottom-line of banks and finance companies to drive home the point that it means business when it says customers come first.

The four Indian regulators across capital markets, banking, insurance and pensions have dealt with customer issues in very different ways. The Pension Fund Regulatory and Development Authority (PFRDA) has worked on getting the product structure of the pension product, the National Pension System, right so that the choice set is limited, costs wafer thin and by separating the fund manager from the seller, the opportunity for mis-selling is negligible. The fact that the NPS is yet to take off in any meaningful way prevents us from evaluating the efficacy of this structure in a mass market. The next youngest regulator, the Insurance Regulatory and Development Authority (Irda) has moved kicking and screaming towards consumer protection. Populated largely by staff of the erstwhile state monopoly Life Insurance Corp. of India, Irda came with the mindset that insurance companies do you a favour when they sell you a policy. In Irda’s worldview, the customer needs to read the policy document, understand complicated present value, future value implications of a stream-of money-in and a stream-of money-out products. The regulator did not agree for a long time that a clean product structure (where costs and benefits sit neatly visible to anybody who cares to look) is the first step in effective regulation. The current stance of Irda is still rooted in the ancient regime of seller-first (look at the way the guaranteed return plans are being sold—where a high guaranteed return on sum assured translates into a thin 4% effective annual return). The work of customer first will take more than just changing the Ulip rules and tinkering with the traditional products —it will need a better understanding of what it takes to build customer confidence—you don’t get there by allowing companies to deliberately confuse investors. Big scams in the capital market have nudged the Securities and Exchange Board of India towards a greater customer focus for the direct stock investors. The big bus product for retail investors, the mutual fund, had customer first in its inception where the money is not with the asset manager but is held in a Trust, with the trustees personally liable for any misconduct and fraud by the asset management company. The product design issues of a front load and marketing expenses being charged from investors have got sorted out along the way. The RBI has traditionally seen its role as preventing a bank from failing, to keep depositors’ money safe. There has been great reluctance to move from this basic hygiene level customer protection to a more sophisticated understanding and implementation of its role. The Cobrapost.com sting earlier this year clearly established the mess in bank branches and other than the RBI everybody else in the market accepts that bank branches are the biggest mis-sellers and churners in the Indian market for third-party retail products like insurance and mutual funds. RBI’s intent to extend TCF from banking products to third-party products is welcome. But RBI will need more than just good intent to solve this problem given the sophistication of banks to check boxes to meet regulatory requirements. RBI should move fast before the markets rebound to put in place more effective measures of customer protection than this statement of intent. A lull in the markets is a great time for regulators to clean up the space.

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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Published: 26 Nov 2013, 07:17 PM IST
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