Vault Matters | Is it miscommunication, misunderstanding or the fear of missing targets that’s the root cause of mis-selling?

Turns out that at least 20% of products sold by banks in asset management and insurance business are cases of mis-selling.

When the finance minister in a briefing with public sector banks asked the chiefs to tackle the issue of mis-selling, it made for big news. The fact that the government is taking the issue of mis-selling seriously sent out a sigh of relief.

Maybe it would be worth it if she summoned chiefs of private banks, insurance companies, asset management companies and every other important player in the financial and financial intermediary ecosystem to give such a warning. But a mere warning alone is not going to solve the issue.

One needs to get to the bottom of the issue.

What causes mis-selling: Is it miscommunication, misunderstanding or the fear of missing a target? The third point is something which has been talked and written about over years. With banks increasingly focusing on non-interest income, especially fees and commission income, it’s quite futile to fight the battle over aspect of meeting targets.

That leaves us with two other options: Is it miscommunication or misunderstanding?

Sample this example I recently encountered.

An acquaintance who is around 85 years of age is trying to solve an equity investment related issue. The person who is helping her out is also a senior citizen, aged about 65 years and both are highly literate. Having struggled to find a solution to this issue for several years they focus on getting things done rather than questioning why a certain process should be done

A few months ago, they were approached by a private sector bank, with a promise to sort out the issue within two weeks. This was in April and despite completion of some basic formalities required for the process, the 85-year old is being coerced to deposit at least Rs 1lakh in a special savings account in order to complete the loop. She’s also been informed that she cannot withdraw the money or close the account for at least a year.

In reality, the process doesn’t involve parking huge a sum of money in a deposit account. When both the senior citizens involved in the matter tried question the bank about the need to lock in big amounts, the relationship manager said she didn't know why such requirements existed and she is just a messenger of what her superior asks her to do. Aware of the realities of how banks function, despite being informed customers, they had to concede to the bank's demands.

Clearly, this an instance of misunderstanding of processes or not having the necessary understanding of a process. Yet, from the point of view of a customer, they are right in feeling that a savings product is being mis-sold to them. Interestingly, it turns out that at least 30% of mis-selling happens due lack of knowledge of the person selling the product.

An instance of deliberate miscommunication: Here's another interesting example a friend encountered some days back. Her father was looking at making a high value deposit with a bank and he wanted to lock-in the money for a long period of time. But it turns out that this private sector bank has as its sister outfit an insurer. A one-time insurance plan with a promise of mouth-watering returns is one of the best-selling propositions of this sister entity. So, her father instead of signing forms for opening an FD ended up buying an insurance product. When he questioned the relationship manager about why he had to avail the insurance product over FD, the manager coolly replied that the requirement put forth to him was that the product should fetch neat returns over a long duration.

This is a classic case of deliberate miscommunication. Turns out that at least 20% of products sold by banks in asset management and insurance business are such cases. This means that the only way to tackle at least 50% of mis-selling instances is by giving adequate training and education to bank staff. If a customer can accomplish a certain job by opening a zero-balance account, the branch staff should not force the customer to open a high value savings account. Likewise, when a customer wants to open a fixed deposit as a savings product, forcing the person to put the money in stocks or insurance products is also mis-selling.

In short, just give the customer what he or she demands, not what is convenient to the bank. That way at least trust in the banking system will improve, and a long-term customer-banker relationship can be forged.