Shield yourself from errant bankers

Last Updated: Mon, Jul 15, 2013 04:22 hrs

Have you been chased by your bank to park your money in an investment or a mutual fund (MF) scheme? Or take up their wealth or portfolio management services? Take heart. Banks for some time now have been bundling their third-party investment schemes and fund-management-related activity along with regular banking to their customers. For some, there might be a sense of security in buying investments or having your money managed by a bank. For many others, it has been a cause for concern.

Complaints about rampant mis-selling of products and mis-management of funds by banks have come to the fore without any grievance redressal mechanism. Prominent actress Suchitra Krishnamoorthi had complained about mismanagement of her funds by a prominent bank.

The Reserve Bank of India (RBI) has recognised this problem and recently issued guidelines to address this problem. These propose to differentiate between normal banking business and third-party investment-related products.

The RBI has been voicing apprehension on the way banks have been selling third-party investment products or even handling their clients' money to invest on their behalf.

The apex bank has said banks should clearly separate core banking activities and investment advisory or wealth management services to avoid conflict of interest, by creating a subsidiary that will be registered under the Securities and Exchange Board of India. Says the report: "To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory and fund management, it is proposed to segregate the two functions."

Among other things, the RBI is worried that the issue of mis-selling tends to hurt a bank's image. In the case of a bank, the RBI mentions the customer's expectations from a bank in terms of the bank's credibility is significantly different than that of any other agent or product distributor. The banks are expected to take greater care while undertaking such services.

In countries such as Australia, financial advisory services have been delinked from the banking business. Says a CEO of a prominent wealth management arm of a bank: "This has been an issue for some time now, and now there are steps being taken to change this."

In its Financial Stability report, issued on June 27, the RBI recognised the seriousness of mis-selling by banks. "Grievances relating to mis-selling, whereby products that are unsuitable for a particular customer, either for commission-linked reasons or lack of knowledge, clarity regarding accountability between the product issuer and the advisor/portfolio manager, need to be addressed by improving consumer protection measures," says the report.

Most banks use their regular staff to sell investment products. Some banks offer "free" advice that is often disguised as a sales pitch for an MF investment or a unit-linked insurance product. Says Sumeet Vaid, founder, Ffreedom Financial Planners: "There is a clear conflict of interest when a bank sells a product to their customers. Many a times people think they are investing with the bank without understanding the product."

Sometimes banks shift their staff between departments, which means you might not get to meet the same investment consultant again.

All of this is set to change. While draft guidelines won't entirely get rid of the mis-selling issue, these will ensure there will be more homework done on your financial situation and only suitable products will be recommended to you. We list some of the changes here.

Dedicated representatives to sell: A normal banking employee who merely facilitates day-to-day transactions such as issuing a demand draft, etc, will not be able to dispense investment advice or recommend wealth management products to you. A bank, henceforth, will have to ensure that normal banking transactions and investment advisory services are different, and dedicated trained investment professionals should sell third-party investment products.

The RBI has also said only suitable products should be distributed to the right individual. This will ensure you get better investment advice to suit your requirement.

More disclosures: Banks will additionally have to disclose that they distribute third-party products and are merely acting as an agent and distributing either MFs or insurance products. Most banks' so-called investment advisors have been giving false assurances on investment products, such as this is safe and it will give you good returns. All this will be a thing of the past. Banks will also have to disclose the commissions they receive from a particular product recommended to you.

Ensure grievances are addressed: The draft guidelines also say that banks have to put in place a "robust customer internal grievance redressal machinery for resolving issues related to mis-selling, agency services, service defaults, etc." Banking customers have often complained that they do not know where to go to address their investment-related concerns. Henceforth, if you have any problem with a particular product being mis-sold by the bank, you will have recourse to addressing your concerns on a priority basis.

Incentive-driven performance to go: Another major issue is incentives or the commission structure of employees. The remuneration of bank employees is directly linked to the amount of products they distribute. More often than not, a higher incentive is the only reason bank employees recommend an investment product.

Not any more. The RBI says that "no incentive (cash or non-cash) linked directly to the income received from a marketing and distribution function should be paid to the staff engaged in marketing/distribution service of third-party products. The staff of the bank is also not permitted to receive incentives (cash or non-cash) directly from a third-party issuer. Banks must ensure there is no violation of the above in the incentive structure to the staff." This should provide a sense of comfort to banking wealth management clients, that the incentive is not on top of the mind when bank distributors recommend a product. This prohibition should ensure you are recommended a product suited to your requirements and financial needs.

RBI's new guidelines will streamline the wealth management business of banks. Here's how it will impact you

Separate wealth management operations
  • RBI has said that banks must separate their wealth management and third-party investment product distribution into separate entities. The latter will be regulated by Sebi.
Your benefit: Next time you enter your bank, the help desk will not tout a new investment product or a fund that gives exceptional returns. You could be assured, this will help reduce the chances of mis-selling and you buying the wrong product.

Enhanced competency of distributors
  • RBI has said that persons undertaking marketing of third-party products should have suitable professional qualification for carrying out the role. There should be a process of continuous development and training (internal and external) so that they may understand the complexity of the product.

Your benefit: You need to know the finer details of an investment product such as its risk and volatility, and where it fits your risk profile. Only a competent investment advisor will be able to answer these questions satisfactorily.

Products should suit customer profile
  • The guidelines say that the sales process should be transparent with full disclosures as to the details of the product. The selling should be need based and mapped to the customer profile.
Your benefit: This will clearly document why a product has been recommended to you and how it suits your investment profile.

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