I wrote last week about the results of the research that household finance economist Renuka Sane and I did, which showed how banks mis-sell third-party financial products in India. You can read the column here and hear a podcast in which Mint editor R. Sukumar talks about the research here. I received a lot of emails from people who wrote in with their individual stories on bank mis-selling. Many of them have stories that follow our findings to the letter. The story is this: your bank knows how much money sits in your account and will contact you when you go to make a fixed deposit (or a public provident fund or a locker or a loan) to hard-sell a life insurance policy.
The story of octogenarian C. Selvakumar is a textbook case of mis-selling. He writes that he is a ‘super senior citizen’ and his income is only from fixed deposits. In December 2014, he approached the customer relationship manager (CRM) of his bank with the intention of depositing 5 lakh in the Senior Citizens Savings Scheme (SCSS). “...the CRM invited two other officers for a discussion. The three of them convinced me (rather brainwashed me) with various printed material and convinced me to invest the money in...a unit-linked insurance plan (Ulip)." He was assured a return of 14%. “Being an 80-year-old man, dealing with officers in the 30s, I asked them whether they would recommend the Ulip instead of the SCSS if I was their father. They categorically mentioned that they would."
In December 2015, when the next premium was due, he found that the fund value had dwindled to 4.11 lakh from the 5 lakh invested. “None of them could be contacted and I realised how heartless they could be to miss-sell a product to an old man who took their word for gospel truth. With no other option left, I paid the premium for the second year. In January 2016, I went through a learning process from various websites and realised that the Ulip was one of the worst investments." It is a perfect crime. When you complain you are told: “But you signed." But the verbal hard-sell and the assurances are so strong that most people capitulate.
This sale should have triggered compliance at various levels in the bank and the insurance company. All regulators have a ‘suitability’ box that sellers must tick—this means that the product being sold must be suitable to the person buying it. Imagine a diabetic being served high-calorie sugar-laden food after he discloses that he wants sugar-free food. Selling an equity Ulip to an 80-year-old man should have rung the alarm bells within the bank and the insurance company, if they had a system in place to catch ‘unsuitable’ sales.
Other mails included mails from bankers themselves. A senior banker, now retired, wrote: “It’s an open secret no one wants to talk about... banks emphasise fee-based income generated out of third-party products like life insurance, general insurance and mutual funds. Further, out of these, life insurance gets priority over others as it generates maximum income, sometimes as high as 35% of the first year’s premium".
Some of you wrote in to ask why we did not name the banks in the study. To name the bank is to deflect the issue from the regulators to the firms. Firms are maximising profit, given the regulatory rules of the game. A witch hunt might penalise five junior front staff—leaving the systemic problem unsolved. No. We don’t want that. The call is for deeper reform. And what could that be?
First-level hygiene will include refocusing financial literacy efforts on the distributors rather than investors. Next, regulators need to align incentives so that a good outcome for the investors means a good outcome for the manufacturers and the distributors. That such an obvious solution should take so long to get implemented by regulators just shows the lack of concern for the disaggregated customers with limited bargaining power—when the whole system is rigged, what options do people have?
Well, people do have options and they have gone to gold and real estate after being ripped off by white-collar criminals. Regulators also need to fix board-level responsibilities if they are serious about combating systemic mis-selling. They need to use mystery shopping as a regulatory exercise to catch malpractices. They can fix the complaints-gathering process to admit complaints that fall between the domains of different regulators. There needs to be a feedback loop from customer complaints that feeds regulatory policy.
Additionally, the government must go ahead and set up the unified financial sector ombudsman, the Financial Redressal Agency. Remember that for every person who is complaining, there are thousands who are not. You can read a longer piece on some suggestions to regulators in this blog.
As a starting point, regulators now need to pay more attention to the implementation of ‘suitability’ in sales because the regulation already exists for each regulator, it just needs to be implemented.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at firstname.lastname@example.org