Home / Opinion / RBI wants banks to hive off advice. Long shot, won’t work

We’ve had issues with the way our banks sell us financial products. We swap stories at social dos about whose bank sold the bigger lemons. After experiencing one or two toxic products sold by banks, we’ve learned to stop the bank official mid-sentence and just stay with what we want. A joke did the WhatsApp round sometime back where a man runs into a bank, pulls out a gun and screams: “Just open an FD for me. I don’t want an insurance plan or a mutual fund. Just the FD." We wonder how banks are able to get away with these pervasive sharp sales when there is a banking regulator in place. Well, you need to know that last week, the Reserve Bank of India (RBI) came out with a notification that will deal with this problem of mis-selling. You can read the notification here: http://bit.ly/1Qygiqr.

The notification wants banks to hive off their investment advisory arm into a separate subsidiary that will need to be registered under the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (http://bit.ly/1RwpKBN ). It gives banks three years to do this. This means that your bank, call it ABC Bank, if it decides to give you investment advice, will not be able to do so using the name and brand of the bank. It will have to set up another entity, say ABC Direct or ABC Wealth, to advise you.

So the bank cannot sell me a mutual fund or an insurance policy anymore, you ask, I’ll have to go to the subsidiary? No. Your bank will continue to sell mutual funds and insurance products through its branches because these are seen as ‘distribution’ rather than ‘advice’, where the bank is acting as an agent of the mutual fund or insurance company. You’re joking, you tell me. What changed then? Nothing.

As long as the bank can continue selling financial products and keep collecting commissions from mutual funds and insurance companies, why will any bank change its business model to one that segregates advice from sales?

The regulator misses a crucial point—as long as there is a commission embedded in a product, there is advice sitting in the sales process.

You’re correct in thinking that this solution doesn’t even begin to cut it. It doesn’t do it for many reasons. First, we’re not going to see banks scramble to open subsidiaries. Why should banks sign up to a higher standard of performance, accountability and responsibility that comes with becoming a registered investment adviser (RIA) under the Sebi rules, when they can continue to sell under the name of the bank, as they do now?

RIAs are seen as ‘fiduciaries’ under the Sebi rules. The adviser, under this fiduciary duty, will have the best interest of the client at heart and will suffer from no conflict of interest. This means that, you, the investor, can depend on the adviser with confidence, good faith and trust. The responsibility of a fiduciary is much higher than that of a seller ensuring a ‘suitable’ sale. Not that the ‘sell them a suitable product with full disclosure’ regulation is followed in letter or spirit by banks today. This is why just five banks took note of the RBI’s 2013 guideline that asked banks to ‘segregate’ advice and sales and register the advisory under the Sebi rules; there is unlikely to be a rush this time around as well.

Second, RBI is restricting its definition of ‘investment advisory’ to only products regulated by Sebi. It leaves out other similar products manufactured by the life insurance industry or the pension industry. But we know that banks mis-sell life insurance much harder than they churn the mutual fund portfolios. Leaving out insurance products from its solution for mis-selling looks absurd to those of us who see the world from a customer’s point of view.

Third, suppose we agree that the subsidiary idea will work, the time given to banks is very long. Three years to set up a subsidiary and move advice out seems like a very long leash. Especially when past experience shows that banks will return at the end of three years to say: we’re not ready. It will hurt our profits. Give us an extension.

Banks have been reluctant to take on more responsibility in their sales practices of third-party financial products—or products that are not manufactured by banks but under the watch of other regulators. Unsurprisingly, banks have not been keen to sign up as insurance brokers with the insurance regulator, but continue to sell life insurance policies as corporate agents. Why? A broker has the responsibility to be on the side of the customer. The agent is the agent of the manufacturer.

RBI must change the definition of ‘investment advice’ to include products regulated by the pension and the insurance regulators as the products they oversee manage investors’ money. It needs to tighten the timeline given out to banks to change their business models. Sebi, too, can tighten the RIA regulations by increasing the entities that fall under its definition of an ‘investment adviser’. Right now there are 11 entities (including insurance agents, pension advisers and mutual fund distributors) that are exempt from the adviser regulation. This list needs to be pruned. But at a deeper level, regulators need to think through what they mean by ‘distribution’ and ‘advice’.

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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