Reference: RBI Circular # DBOD.CO.FSD.No./24.01.026/2012-13
Draft Issue Date # June 28, 2013
Not long ago you might have felt being cheated by your bankers, on account of mis-selling of financial & investment products over past so many years. But, the irony of fact is that, it has been too wide spread across indian banking space; that now even RBI has taken notice and covered it in the
draft of wealth management guidlines.
Taking in account recent and ongoing instances of misselling being experienced by clients at banks; RBI has now shown signs of coming down heavily and has issued draft guidelines for Wealth Management Marketing / Distribution Services offered by banks. For the first time RBI has come with the reasons as to why mis-selling has been observed to be so rampant at Banks; and that it is the need of hour to regulate the Wealth Services being ofered by banks.
Wealth Management
In the draft guidelines, RBI has quoted that, banks offering wealth management services are exposed to reputational risk. This has been evident on account of:
- violation of KYC / AML Guidelines
- mis-selling of products, or selling products unsuitable to clients,
- conflict of interest,
- lack of robust risk management system & procedures leading to frauds
- lack of knowledge and
- lack of clarity about products and frauds
RBI has also found out in the recent past that banks were involved in structuring transactions to aid tax evasion and fraudulant transfer of funds. It was observed that many of these transactions centered around WMS (Wealth Management Services) provided by banks as well as marketing of third party products.
Marketing & Distribution of Third Part Financial Products
RBI has clearly mentioned in the guidelines draft that, it has been observed that in some cases,
- banks did not have clear segregation of duties of marketing personnel from other branch functions
- bank employees were directly receiving incentives from third parties, such as insurance, mutual funds and other entities for seling their products.
These practices enable tendencies of mis-selling and distortion of staff incentive structure.
RBI has made clear that - "in case of a bank acting as distributor, the customer’s expectation from a bank in terms of the bank’s credibility is significantly different than that of any other agent of the product issuer. Thus banks are expected to take greater care while undertaking such services, including avoiding mis-selling."
As per the guidelines, mis-selling of products and services occurs when :
- products that are unsuitable to the client profile are sold to him, particularly through misrepresentation or by linking it with banks’ own products e.g., making purchase of insurance compulsory along with a car loan.
- there is a lack of knowledge of the product being sold, and occurs when untrained staff sell products.
- mis-selling may also arise from the provisions regarding payment of commissions and incentives which distort the selling structure.
Section 10(1)(b)(ii) of the BR Act, 1949 prohibits a bank from employing or continuing the employment of any person whose remuneration or part of the remuneration takes the form of commission or of a share in the profits of the bank, save as exempted in the Proviso thereto. Accordingly, payment of a portion of the commission earned on marketing and distribution of third party products by the bank to the staff would fall under the said prohibition.
Accordingly, undermentioned are a few excerpts from the conditions proposed by RBI in addition to the extant instructions:
- Banks should disclose to the customers, details of all the
commissions/other fees (in any form) received, if any, from the various
mutual fund/insurance/other financial companies for marketing their products. This disclosure would be required even in cases where the bank is marketing products of only one mutual fund/ insurance company etc.
- Banks should disclose in the ‘Notes to Accounts’ to their Balance Sheet, the details of fees/remuneration received in respect of the marketing and distribution function undertaken by them.
- As mis-selling is a serious issue in terms of consumer protection, the bank should put in place a policy approved by its Board regarding marketing and distribution of third party financial products which should, inter alia specifically consider the issue of addressing mis-selling.
- The sales process should be transparent with full disclosure as to the details of the product. The selling should be need based and mapped to the customer profile.
- Products should be marketed only in branches having specified trained personnel for the purpose.
- The persons undertaking such marketing/distributions services, should not be entrusted with any other approval/transactional process at bank branches. There should be a clear segregation of functions between marketing and operational staff.
- There should be a Code of Conduct for the sales personnel who should adhere to the same.
- The fact that the bank is acting only as an agent should be clearly brought to the notice of the customer.
- Banks should set up SIDD (Seperately Identifiable Divisions or Departments), so that conflict of interest be handled; and seperating marketing / transactional / advisory divisions.
It may be ensured that there is no violation of Section 10(1) (ii) of the BR Act 1949 in payment of commissions/incentives as well as of Guidelines issued by the regulator of the third party issuer. No incentive (cash or non-cash) linked directly or indirectly to the income received from marketing and distribution function should be paid to the staff engaged in marketing/distribution services of third party products. The staff of the bank is also not permitted to receive any incentive (cash or non-cash) directly from the third party issuer. Banks must ensure that there is no violation of the above in the incentive structure to staff.
There should be no evasion of these regulations by accepting several amounts for lower values from the same client to avoid the stated threshold.
We have taken excerpts from the draft guidelines issued by RBI. The comprehensive document covers PMS (Portfolio Management Services), IAS (Investment Advisory Services), and much more.
What Options Does a Client Have...?
Cogent Advisory has always maintained the stance that "Let The Banks Do Banking, You Should Have a Private Family Wealth Management Firm, managing your funds".
Banks are also limited in respect of products and services, where by it has been observed that they predominantly sell insurance and mutual funds. Hence, this results in the biasedness in the way investments are being managed.
When your approach a Pure Wealth Management & Advisory Firm, you have a better, diverse and advanced product and service choices; as these firms, in order to remain competitive, bring the best in class services & products to your desk. Moreover, fee based services remove the conflict of interest, with provider being able to meet its costs & client is saved from the risk of being sold higher commission based product.
