Anybody who has walked into a bank branch in a metropolitan city would have been pushed towards a financial product that he or she didn’t want. Worse, they may have been forced, cheated into or otherwise pushed towards buying life insurance policies. I documented my own search for a Public Provident Fund account two years ago: http://bit.ly/1sye5F8 . A question asked very often by readers of this column is this: why don’t the regulators or government stop this coercion? The banking regulator, for a long time, took the view that mis-selling of third-party products was not their problem, but rested with the product regulators. The capital market regulator said that it could not tread on the Reserve Bank of India’s (RBI’s) toes. The insurance regulator put down these instances to the overactive imagination of some illiterate journalists.
Where is the evidence, they asked. If people had such problems, surely it would show up in complaints data. It is just one or two cases that the media blows out of proportion, they said. So I decided to go get the evidence. Getting in on private conversations between a banker and his client is not possible, so the next best route was to set up a mystery shopping exercise. This is an academically accepted method to find out ground realities. It is not a trap as the experiment is set up in a manner that is open to being questioned. Also, it is a double blind—the auditors who go out to fill a form have no idea what we actually want to document and the bank managers have no idea that this walk-in customer may not be real.
I teamed up with an economist at the Indian Statistical Institute, Renuka Sane, who works in the emerging area of household finance, to set up the study. The research was funded by National Stock Exchange–IFMR Finance Foundation Financial Deepening and Household Finance Research Initiative. The money went into hiring a market research firm Indicus Analytics, a Nielsen company, to set up the audit through third-party auditors; neither Sane nor I took any fee for this work.
We set up a believable experiment. A person walks into a bank branch (we first audited 200 branches in Delhi across public, private and foreign banks) in March 2015, looking for a tax-saving product. Middle-class India rushes to buy financial products that save them tax under section 80C of the Income-tax Act, 1961 towards the end of the financial year.
There were four variations. The naive investor looked for any tax-saving product, the sophisticated one looked for an equity-linked saving scheme (ELSS) to save tax. The reasons for choosing an ELSS are in the paper. Auditors said that they wanted to invest either 25,000 or 1 lakh. The auditors documented the process of the sale after they left the bank and they carried the visiting card and the scribbles of the bank manager with them.
The result is there in the paper titled Misled and Mis-sold: Financial misbehaviour in retail banks? where we found that public sector banks mostly sell fixed deposits, no matter who walks in or what they ask for. The private sector banks mostly sell life insurance, no matter what is asked for. We also found that foreign banks don’t let you in the door unless you have an account. The public sector bank and private banks’ behaviour fits in with the incentives for the staff. State-owned banks have internal targets based on deposit mobilisation and private sector banks have variable pay linked to sale of high-commission-earning products. We then made the study deeper and asked for much more detail on the product being sold. In another set of 200 branches in July 2015, the auditors asked for returns, costs, guarantees, lock-in and optimal holding period. This is where the results got interesting and depressing. We found that banks do not take time to find out details about customer situation, risk appetite and existing portfolio details. All these are basics, and are needed to tick the ‘suitable sale’ regulatory box.
Voluntary disclosures during the sales process centred on returns and guarantees, and costs were never mentioned unless specifically asked for. We also found that when asked specific questions indicating a sophisticated investor, banks talk a lot. They are happy to make a lots of disclosures. But here’s the thing. These are mostly wrong. For example, 99% of return disclosures in insurance were incorrect; 86% in mutual funds (MFs) were incorrect; and 100% of disclosures on costs on life insurance products were incorrect, 85% were wrong for MF cost disclosures. Whether this is by design or through own illiteracy is not clear. Whatever may be the reason, for an important sales channel to misrepresent basic product features essential to the sale, should ring regulatory alarm bells. This is no longer about overactive imagination of some illiterate journalists.
You can read a short summary of the paper at: http://bit.ly/2b8sBjM . You can read the working paper at: http://bit.ly/2b0djMk . A working paper means that we are still working on it, so any comments about flaws in it are welcome so that we can keep updating our work. Also, do write in with your own bank mis-selling stories at my email below. Give the name of the bank, what happened and why you thought you were mis-sold. Keep it short.
What should regulators do? Take mis-selling seriously. That regulators are beginning to move from denial and ridicule to acceptance is clear when you examine the repeated statements by RBI senior staff on mis-selling. The Insurance Regulatory and Development Authority of India on 1 August 2016 accepted finally that banks mis-sell and has warned banks to stop doing it: http://bit.ly/2balExD .
There is still a long road ahead in getting the market ready for the mass push of financial products through the ambitious Jan Dhan Yojana.
I can only hope that we do that before firms start pushing toxic unwanted products down the Jan Dhan accounts to people who simply cannot afford them. If mis-selling happens here, we are looking at a political volcano.
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