In banks should we trust?
The only way to avoid falling prey to banks’ mis-selling is to get your investment advice from one trusted source and purchase products from another.
For years, banks have been guilty of mis-selling. According to experts, even the well-heeled have been caught unawares by their smooth-talking relationship managers.
The special operations group of the Rajasthan Police recently filed a First Information Report (FIR) against a few executives of ICICI Prudential Life Insurance and ICICI Bank. Employees of these organisations are alleged to have unfairly convinced senior citizens, farmers and labourers, who wanted a simple fixed deposit, into buying insurance products. The customers, whose entire lives’ savings were used to pay a single premium, were shocked when the insurer’s employees called up seeking another premium after one year. And, reports say these customers were told that they would lose their entire first premium, if they do not pay the next premium.
When Business Standard contacted ICICI Prudential, the insurer sent an emailed reply: “ICICI Prudential Life Insurance Company and ICICI Bank conduct business with the highest level of compliance to regulatory and legal requirements. We have a well-defined code of conduct which our employees have to adhere to. All life insurance products are approved by the insurance regulator, which has put in a multi-level grievance redressal mechanism. ICICI Prudential Life has one of the lowest customer ‘grievance ratio’ and one of the best ‘persistency ratio’ in the life insurance industry. There are three cases mentioned in the FIR filed by the Special Operations Group. ICICI Prudential Life refunded the money to the customers, well before the FIR being filed in November 2017. We have been and will continue to extend full co-operation to the authorities.”
The ICICI case is not an isolated example, and experts say there are many such instances from other leading banks. “Bank employees and relationship managers are given stiff targets, and many times, a free hand. This leads to serious mis-selling,” says a banker. Repercussions of mis-selling: Often, banks sell multiple-premium insurance products to customers while making them believe that they are being sold a single premium product. The repercussions of such misselling are very serious for the buyer’s finances. Suppose that a person who has received ~700,000 from his provident fund gets sold a traditional plan. When the request for the second premium comes in, in most cases the person is unable to cough up the money. “In a traditional plan, you typically get nothing back unless you have paid two or three premiums, depending on the policy, because the policy can’t be made paid-up,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). In a unit-linked insurance plan (Ulip), you don’t lose your money entirely, but you can’t withdraw it before five years. After deducting costs, the insurer puts the money in a discontinuance fund, where it earns four per cent annual interest. If you have paid just one premium, the tax deduction you availed gets clawed back. Stiff targets, ignorant customers: A toxic brew of factors is responsible for mis-selling by banks. One factor is the faulty remuneration structure of the insurance-cum-investment products that are mostly mis-sold by banks. “The remuneration should be spread over the life of the product. Any product where a very high percentage of the commission gets paid out in the very first year will be prone to mis-selling, because the seller’s responsibility ends after the first year,” says K C Chakrabarty, former deputy governor of the Reserve Bank of India.
Banks are also becoming increasingly reliant on profits made through the sale of third-party products. “The pressure on bank staff to meet stiff targets is increasing day by day,” says K Vaidya Nathan, lecturer of finance at the Indian School of Business. While bank staff have aggressive targets, financial products are complex and their nuances are not understood by many. As financial inclusion progresses, many people are coming within the ambit of the financial sector, who lack the capacity to understand these products. They are a ripe target for mis-selling.
Senior citizens are especially vulnerable. They often have a lot of money lying in their accounts — their life savings, provident fund money, and so on. Many may also not be very financially savvy. They don’t have the time to replenish their savings if they lose them. And, they lack the physical stamina to pursue redress mechanisms.
How to avoid falling prey to misselling: If you have been dealing with your bank for a long time and trust it, well, it is time to turn more cautious, especially when buying third-party products from them. If the bank staff harasses you to buy a product during a visit to the branch, use this trick. “Say that you will write to the banking ombudsman about this. The very threat makes the seller back off,” says Vaidya Nathan, who has had to resort to this on one occasion in the face of aggressive mis-selling. Bank staff also badger you to start a fixed deposit when you ask for a locker. “Write to the bank’s chief executive officer or managing director. Since the regulator frowns on such practices, I have heard back from banks within an hour, saying a fixed deposit won’t be necessary,” says Raghaw.
Customers often sign on blank forms, allowing the agent to fill it. That is a big mistake. Banks later claim in court that the customer became party to the contract willingly. Says Arun Saxena, president, International Consumer Rights Protection Council, “Once the document is filled up, make a photocopy. If changes are made to it later, you will have proof.” He also suggests asking for written recommendations.
An inherent conflict of interest arises when you take advice from a product seller. To avoid it, separate advice from purchase. If you have a large amount of money to invest, pay a fee to a Sebi-RIA to make a plan for you, then buy the recommended products from another source.
Finally, be wary of buying products where upfront commissions are high. In traditional insurance plans, the first-year commission can go as high as 40 per cent of the premium. In Ulips, the first-year commission is lower at five-six per cent or lower but their mortality charges are higher than of term insurance. In mutual funds, the commission in closed-end funds is higher at six-seven per cent than in open-end funds. Also, most banks are likely to sell you a regular plan rather than a direct plan (whose expense ratio is lower).