Ask any retail consumer of financial services and you will find at least one instance where she or someone she knows experienced an act of mis-selling by a bank representative. Until recently, these experiences were not getting formally captured in the regulatory radar. A 2017 amendment to the RBI Banking Ombudsman Scheme seeks to change this. This amendment widened the scope of the scheme to include violations of the RBI guidelines on para-banking activities through improper, unsuitable sale of third-party financial products. While it is unclear why such a category does not include unsuitable sale of banks’ own products, for the first time there is acknowledgement that banks can do harm with respect to their selling practices. It, however, severely underestimates the magnitude of the same.
RBI’s Annual Report of the Banking Ombudsman Scheme released on April 24, 2019 states that mis-selling has constituted 0.4% of complaints under the Ombudsman. This is about 650 people. It is hard to reconcile this with experiences such as rampant sale of Ulips that resulted in losses of ₹1.5 trillion to investors during a seven-year period in 2004-2012 (Halan et al, 2013).
The largest number of complaints received for the year were under the categories of non-observance of fair practices code (22.1%), ATM and debit card issues (15.1%), credit card issues (7.7%), failure to meet commitments (6.8%), and mobile and electronic banking (5.2%). One issue with these categories is that it does not provide information about where in the entire customer engagement life-cycle did the consumer experience fail. We would be interested in parsing out for instance, misleading advertisements from data privacy violations. Each of these should elicit regulatory responses. With respect to three closely related categories namely “non-observance of fair practice code”, “non-adherence to BCSBI Codes” and “failure to meet commitment”, there are overlaps that could be avoided. It is also symptomatic of a bifurcated regime for conduct that the RBI has operationalised and oversees directly and or through delegated bodies such as the BCSBI. On the topic of mis-selling, the BCSBI Code of Banks’ Commitment to Customers contains an obligation to ensure suitability, although it is applied only to banks’ sales of third-party products. This keeps banks’ sales of their own products like loans and term deposits outside the ambit of such a requirement. This is an inherent contradiction given that retail customers view all products sold through the banking channel as the same. Hence this arrangement offers uneven protection.
Notwithstanding these concerns, RBI’s inclusion of a category on mis-selling is definitely a start that should evolve in a shared understanding of what might constitute mis-sale. While today’s fair practices codes and the RBI’s Charter of Customer Rights capture some language around assessing suitability and ensuring a right to suitable products and advice, more can be done.
We argue that suitability, or at least a reasonable minimum benchmark of ‘avoiding any sale that is unsuitable for the customer’, is something that all service providers must aspire to incorporate. This means that at the very minimum, providers demonstrate policies and processes that articulate how they plan to meet this minimum benchmark.
For instance, before selling an investment product, the provider must have conducted adequate due diligence about the customer’s financial situation, risk profile and capacity, that the transaction meets the customer’s investment objectives. Such due diligence must not be based solely on the risk appetite of the customer. If the regulator can clarify these objectives and how it intends to measure performance against these objectives through a significantly upgraded supervisory process that looks at demonstrated conduct of institutions, mis-selling will become tremendously easier to identify and prevent.
To this end, a re-framing of complaint categories would help towards better data capture. Mis-selling is a broad theme that needs to capture categories such as failure to act in client’s best interest, inappropriate or wrong advice, failure to consider customer needs and circumstances, and poor risk-profiling of customer. This is the need of the hour since armed with access to new forms of technologies, providers in India are set to bring millions of “new-to-bank” consumers under the fold of formal financial services. Without a sustained focus by regulators on mis-sale, we put at risk confidence of the retail customers.
This article first appeared in Livemint.