RBI’s unanswerable 29 questions and lessons for merchant bankers

RBI’s unanswerable 29 questions and lessons for merchant bankers

As a rookie reporter I was petrified that I would not be able to provide enough detail in a story under the editing keyboard of my editor. After looking stupid several times, I would set out to interview with a list of questions that included the name of the CEO’s dog, the brand of nail polish his wife favoured, the colour of the wall behind his head and other such trivia that I thought may suddenly be needed at 11.45pm on a Saturday. But along the way, I learnt to filter out the noise from the meat and gather information without asking inane questions. I wish I could say the same for the list of 29 questions that the Reserve Bank of India (RBI) sent to banks last week in an attempt to gather information on mis-selling by wealth managers. Here’s a prediction: The answer set that RBI gets on these 29 questions will take it no closer to understanding the bank mis-selling equation.

Having worked inside the government for a while and meeting all levels of the regulatory staff of the financial sector, I have to say that the questions ably showcase the mindset of the middle regulatory staff. One eye is fixed on what the boss wants, the other on not taking a decision that will endanger a smooth career path. The result is the list of unanswerable questions that Mint Money printed earlier this week (read the questions at http://bit.ly/mQXI7q).

A banker I spoke to said that while they tried in all earnestness to answer the questions, it was a task almost impossible to do, given the wall-to-wall nature of the information demanded. Others in banking are treating the 29 questions with the same sort of check box regulatory data feeding that they are used to doing. After sitting on it, they are giving reams of information that will take years to sort out. If RBI’s goal is to prevent mis-selling by banks, possibly the information collection could begin with focusing on the big potatoes rather than ask for wall-to-wall information that will finally serve no purpose. My suggestion: be less ambitious in information collection. Fix a goal on why you need the information and then send out specific questions. If the premise of gathering this information is to find out whether or not there is mis-selling of financial products through the banking channel, possibly RBI could spend time in defining mis-selling. From that definition, a set of questions will arise, which when answered by banks may lead to a more useful set of information. For example, suppose we were to define mis-selling (as do most global regulators) as: “an advised sale that does not meet the requirements for suitability, or the ‘know-your-customer’ obligations", or “an ethically questionable practice of a salesperson misrepresenting or misleading an investor about the characteristics of a product or service. In an effort to make a sale to a potential customer, a financial products salesperson could leave out certain information or describe a financial product as something the investor urgently needs, even though sound financial judgement would come to the opposite conclusion", we may find that suitability will arise as the first handle to catch mis-selling by. Says a banker, “Wouldn’t it be simpler to find out which bank sold a life insurance policy to a person over 55 years of age? Make that the beginning point of an investigation into mis-selling and then broaden and deepen the process. And affix large compensations."

Also read | Monika Halan’s earlier columns

Endnote: Should merchant bankers be evaluated on the kind of issues they bring to the market? You read the merchant banker report card in Mint on Tuesday (http://bit.ly/jFflmO) and found out that the industry has got an “F" in performance of stocks brought to the public. While the story was being done, we found the financial sector split down the middle on evaluating a merchant banker on the basis of the performance of the stock he brings to the market. The bankers are vehement in their arm’s length distance from stock performance. So why advertise on the prospectus who the merchant banker is? When an investor sees a blue-chip name associated with a bank or a large global multinational, there is a certain status that the IPO gets in her eyes. The pricing of the issue is decided in consultation with the merchant banker. Stock investing is about risk and out of 10 issues, it is reasonable to assume that the banker will get some calls wrong. But if all the calls go wrong and if all IPOs brought by a merchant banker are duds, maybe the investor should worry about the names on the cover of the IPO forms. And possibly how to look after the customers’ interests could be learnt from this story. A shop called The Cake Shop near my house is a middle-class bakery, cold drink, chip store. But now one finds imported cans of tonic water, bitter lemon and blueberry tins along with the usual namkeen and cake rusk. A new imported juice can had me asking the portly owner if it was safe to drink. “I am responsible for what I sell in this shop. Each thing that I sell, I stand by it. It is safe."

Illustration by Shyamal Banerjee/Mint

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at expenseaccount@livemint.com