A recent news report in The Times of India suggests that in order to curb mis-selling, “insurance agents may be required to maintain audio-visual records of [the] sales pitch” they make to prospective buyers of insurance policies. A letter suggesting the same seems to have gone from the Centre’s consumers affairs secretary to the financial services secretary.
While some record of the sales pitch is perhaps better than no record, the move isn’t going to help India curb mis-selling much. Even though the actual mis-selling of insurance and other investment and financial products is done by insurance agents, wealth managers at banks, etc, the push for it comes from the top management. And this is not just an Indian phenomenon.
Martin Wolf has an explanation in The Crisis of Democratic Capitalism: “It is not hard to view corporations as amoral—that is, institutionally incapable of recognizing the distinction between right and wrong or feeling remorse or empathy. This is not just because, being institutions, they are incapable of feeling anything.” It’s also because of how incentives are set up.
Commissions are made on getting sign-ups for investment deals lower down the hierarchy, while employee-linked stock options incentivize their growth at higher levels. This institutionalizes product mis-selling.
Further, as Wolf suggests, “Top executives are unlikely to be held personally liable for anything.” He offers the example of the global financial crisis—where the financial services industry primarily mis-sold home loans—and its aftermath: “The executives who drove their banks (and the world economy) into the ground, before the global financial crisis, mostly walked off with large fortunes, while tens of millions of innocent people’s lives were ruined and governments were forced to provide huge bailouts.” For these shenanigans, only one banker went to prison in the US and none in the UK. Higher-ups in financial service firms rarely bear punitive costs for the mis-selling they incentivize.
There is another side to this. Many would-be investors and consumers of financial products are financially illiterate. Quite a few do not understand the basic math required to make sense of any financial investment or product. So, this leads to information asymmetry, where the side selling the product is far better informed than most buyers.
At the same time, age-old human greed is at work, with prospective investors in a hurry to get rich. This makes mis-selling easy. For a few years before the financial crisis of 2008 broke out, bankers and others working for home loan companies in the US and parts of Europe sold floating-rate home loans with very low interest rates and EMIs in the first few years to the poorest of the poor. Many people who took on such loans did not know that EMIs would go up. Further, some of these loans were ‘negative amortization loans,’ where the difference between the very low EMI that had to be paid for the first few years and the actual higher EMI was added to the loan’s outstanding, and so the loan amount kept increasing instead of shrinking with every EMI.
On the flip side, even people who knew that EMIs would increase were hoping to flip the house they bought on a loan and make a quick buck before higher EMIs kicked in.
In India, during the 2000s, many insurance agents mis-sold unit-linked insurance plans(Ulips) to investors promising them that the investment would double in three years. As a personal finance editor of a daily newspaper, this writer received several such proposals. Ulips are basically structured like mutual funds and come with a dash of life insurance.
So, yes, those working for the financial services industry do mis-sell, but they are able to do that because there are many people out there waiting for something to be mis-sold to them. There is a market for it and those who run financial firms cater to it.
In fact, a lot of mis-selling stems from the fact that many people do not understand basic high-school math, and they end up buying investment products that they shouldn’t. The irony is that they never even realize this and continue to buy such products. Some investment-oriented insurance plans like endowment plans and money-back policies, which are fairly opaque in their structure, are excellent examples. The agents selling such policies are often so well-connected in the localities they live in, that it can be very difficult for people to say ‘no’ to them when they come selling their wares.
So, just recording the sales pitch isn’t really going to do much. This needs to be followed by the setting up of more consumer courts to deal specifically with the mis-selling of financial products. Of course, judges in these courts will need to understand these products to start with. They will need training. Also, along with financial fines, heavier punishments need to be considered.
Further, the basics of personal finance need to be taught at the high-school level, so that by the time individuals start working, they have some idea of what to do and what not to do with the money they are earning.
If all this and more is thought through and implemented, we might see results a few decades down the line.