Opinion | Why you have no ‘mai-baap’ as retail investors in India

Indian investors periodically hit the headlines when there is a large blow-up of some product or market. We’ve seen recently a cooperative bank failure. Then a private scheduled commercial bank (those that usually are not allowed to fail) saw its operations and deposits frozen for a few days. Even as the depositors in Yes Bank got their money back, the investors in its AT1 bonds saw their money disappear. These high-risk bonds were mis-sold by Yes Bank managers as FDs to senior citizens among other low-risk investors. Debt mutual fund investors have seen money they thought safe being exposed to excessive risk as fund managers cut deals with promotors, introducing the risk of equity in debt funds. A series of bond downgrades have left retail investors booking large losses over the past year. The latest has been the Franklin Templeton story that saw a liquidity problem become the cause for shutting down six schemes. The matter is now sub-judice since one HNI got a stay. These are the stories that come into the public eye, but there are plenty others that don’t make news simply because the investor is not an HNI or does not belong to a strong group such as a broker lobby.

It is worth asking the question that why do investors periodically take to social media, write letters to the FM, PM and then some of them finally go to court? Why is there no redressal system in place that allows solving investor grievances? We are not talking about the unregulated part of the market with multi-level schemes, frauds and phishing attacks. This is the regulated market where consumer protection is the remit of sector regulators.

The answer is that we have a broken marketplace for retail finance. The first issue is the ambiguity of who the marketplace is designed to serve. For example, in life insurance, it is designed to serve the insurance firms and the agents and not the policyholders. When reform initiatives end with the livelihood argument of agents or long-term financing of Indian enterprise rather than investor benefits, clearly there is a flaw in the marketplace. Second, the turf war between regulators prevents an investor-first resolution of issues. If products were to be regulated by function and not form, the marketplace will look very different. Third, the incentive structure for most products encourages sharp sales, mis-selling and outright fraud. The boards of firms and banks oversee the management, which designs the incentives structure that causes front line staff to resort to such sales. When there is a blowout, some junior front line person gets the blame, while the management who designed the game, goes home with their bonuses and stock options.

Not just the market, the grievance system is flawed as well, with investors having to figure out which regulator their problem comes under and then finding out what works. The report of the Task Force to set up a common redressal agency gathers dust in North Block. Then there is the problem of a complaint falling between regulatory cracks. For a mis-sold mutual fund or life insurance plan by a bank, who is responsible—Sebi, Irdai or RBI? RBI has determinedly dug its heels in and refused to regulate banking staff that sells third-party products.

Customers can go to firms with their complaints, but don’t usually get very far. RBI and Irdai have ombudsman schemes but these have remained a long-winded road to getting nothing much back. The lack of a feedback loop of the kind of complaints coming in also puts limits to the efficacy of these expensive structures that end up being post-retirement benefits. The road to courts is paved with cost, delay and the inability to use class-action suits to make the case large enough to solve the problems of many. It is not worth the while of one individual to hire a lawyer and spend years in litigation to prove that the bank mis-sold a life insurance plan to an 80-year-old man. It is easier to just write it off as a bad investment. A recent paper by economists Karan Gulati and Renuka Sane finds that “...laws in India create a system which either prohibits or disincentives class actions.”

While the law is an ex-post solution, prevention is mostly better than cure. While there can be several ways to solve this problem, a low-regulatory-cost one will be to move to a seller beware marketplace from a buyer beware one in retail finance. This means that the seller or adviser or planner sells a “suitable” product and is held responsible for a “non-suitable” sale such as selling AT1 bonds to FD-seeking retired people. But that is a long road. Till then, you have no mai-baap, so unless you understand what you are buying, you are better off with your money in very low-risk and, therefore, very low-return products.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation