I don’t think there will be many people in urban India who do not have a bank mis-selling story to share. The systemic use of bank branches to mis-sell life insurance products and to churn mutual fund portfolios is now part of the urban Indian discourse. The problem is not new. I remember first raising the issue of banks mis-selling insurance and mutual fund products in 2007 with one deputy governor of the Reserve Bank of India (RBI). I was treated to lunch and anecdotes from those in the room of how people close to them were ripped off by banks. In fact, subsequently, in every committee I served on—Swarup Committee 2009 (bit.ly/2tLat6F) and Bose Committee 2015 (bit.ly/2rS3xmK)—the offline conversations included stories of bank branches turning into dens of tricks and traps. I’ve raised the issue of mis-selling with RBI, and with the ministry of finance, and so have others who work in this space, most notably Moneylife magazine (bit.ly/2t7r5HJ and bit.ly/2sHtN6b), which has raised it on multiple occasions. But the messaging that came down from the towers of oblivion on Mint Street was always the same: not our problem; let the sector regulators deal with this.
The push-back from RBI was: ‘where is the evidence?’ Three years ago, economist Renuka Sane and I teamed up to map the process of mis-selling by banks. We sent mystery shoppers to 400 bank branches in Delhi posing as customers looking for a tax-saving product. We found that the malaise of mis-selling was systemic—it was across the board and deeply embedded in the banking system. You can read the highlights of the paper here: bit.ly/2aYhbvk and the paper here: bit.ly/2scs2dI. In 2015, Sane and I presented the results of this study to the then governor of RBI and 25-30 other members of staff. Offline conversations with some staff drove home to us that our paper underestimated the depth and breath of the problem. It has still taken RBI 2 years, after concrete evidence was presented to the regulator, to include mis-selling as a complainable offence. In fact, the most bizarre RBI pushback against accepting that banks mis-sell was when in one committee meeting, the RBI view was that their consumer grievance redressal system has excellent metrics; “where is the mis-selling"? Well, it seems that if you don’t define the crime, you don’t catch it. After 10 years of denial, the credit must go to governor Urjit Patel for biting the bullet and accepting that mis-selling by banks is indeed RBI’s problem.
The RBI, in a 16 June 2017 notification, amended the Banking Ombudsman Scheme to include sales of insurance, mutual funds or any other third-party products. From 1 July, you will be able to complain to the banking ombudsman (bit.ly/2scDSEN) if you are mis-sold a financial product. Till now, there hasn’t been any place to even complain; you were bounced from the bank to the sector regulator—Insurance Regulatory and Development Authority of India (Irdai) or Securities and Exchange Board of India (Sebi)—for crimes committed by banking staff. You will be able to complain to the ombudsman if the sale is ‘improper’ or ‘unsuitable’, not transparent, if you are not told about the grievance redressal mechanism and if you are denied after-sales service. The notification, however, is silent on the definitions of ‘improper’, ‘suitable’ and ‘transparent’. In a Round Table organised at the National Institute of Public Finance and Policy (NIPFP) in 2016, we found that Indian regulators, along with the rest of us, are clueless about what ‘suitability’ of a financial product actually means. You can read the notes of that Round Table here: bit.ly/2t7EwHI. There is clearly more work in this space for the regulators to do.
The ‘win’ or ‘victory’ as it is being called is a case of too little too late, says my co-author of the paper, Renuka Sane. The problem of RBI and its staff being the final authority for consumer complaints still remains. For example, consumers unhappy with the ombudsman’s decision can appeal to the appellate authority. Who is this authority? It is a deputy governor in charge of the implementing department of the RBI. We can argue that this should not be a part of his job but be outsourced to a regulator-agnostic agency that looks after all financial sector consumer complaints. In 2015, the government constituted a task force to think through the setting up the Financial Redress Agency (FRA)—the combined redressal agency across all financial sector regulators. However, the RBI’s official position has been to oppose the agency. RBI believes that its record in consumer grievance redressal is ahead of global standards. The government must disregard such regressive turf issues and press ahead with the FRA.
The RBI must think through some next steps. One, refocus financial literacy efforts to educate its own staff and banking staff rather than investors. Two, align incentives so that a good outcome for investors means a good outcome for manufacturers and distributors. Three, fix bank board-level responsibilities for processes and incentives that encourage mis-selling. You can read more on this here: bit.ly/2bei1Vt and here: bit.ly/2bIWwwM.
It took 10 years for India’s banking regulator to accept that banks mis-sell. If RBI spent less time being a lunch room for the top officials, maybe there will be better focus on consumer protection.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at email@example.com