OPINION | Vault Matters: RBI’s directive on mis-selling is a band-aid on the wound, not a cure

It is a welcome move that the RBI has come up with draft guidelines

What do you do when the seatbelt of your car is not working properly or the airbags have failed? You could take it to the nearest dealer to address the problem. But the entity that would actually solve the issue is the car manufacturer. The dealer is only the facilitator.

Extend the same logic to the issue of mis-selling of financial products. It is a welcome move that the RBI has come up with draft guidelines on this. But the question that still remains is whether this is going to solve the problem? Without any prejudice to the issue at hand, the answer is a clear no. Here’s why.

Lack of accountability 

The issue around mis-selling of a life insurance product came to fore when a bank tried to sell it to a 90-year-old. On the face of it, the instance is laughable. But who should be held accountable for bad quality of sales?

Is it the sales person or is it the firm creating the product which does not have a proper SOP, or standard operating process, for sales?

From a bank’s standpoint, the mandate is to ensure that a certain number of life insurance products are sold. But the entity which should be doing underwriting is the insurance company.

The microfinance example

The classic example to drive this point home are issues faced by the microfinance industry. Nobody blames the borrower for taking too many loan products. Everyone’s calling out the lender for careless lending and overleveraging.

How is it fair that when it comes to insurance products or mutual funds, the buck stops with the bank, when in reality, the insurer must be held accountable for having sold a product which is unsuitable for a 90-year old?

The role of insurers and mutual funds in mis-selling

We need to simply ask, where were the underwriting standards of the insurance company? Why did the insurance company not reject the proposal to give a life insurance policy to a customer who does not satisfy the income criteria for the product?

Majority of mis-selling happens because the insurance sector and the MF industry are unwilling to accept responsibility. They are only interested, sadly, in the number of products sold and not in the quality of the persistency of products sold.

Unless the relevant regulator which is IRDAI in this case, stands up to take a view on this matter, mis-selling will continue to happen, no matter what norms the RBI comes up with to plug the gap.

Lack of repository 

One needs to acknowledge that the presence of credit information companies has, to a large extent, ensured the asset quality of retail loans. Whereas in insurance and mutual funds, there is no such repository to check how many policies or funds the customer has already taken and whether the customer has the earning potential to pay the premiums or monthly sums. Lack of such a database is yet another reason for rampant mis-selling. At this juncture, it is not clear whether IRDAI or Sebi are trying to address this issue.

Lack of after-sale service 

Let’s go back to the example of a car. If there is any defect in the product, the customer can go back to his showroom or nearest service centre for help. When a customer of a bank buys a mutual fund product or an insurance product, is there a sales representative at the bank branch to service the customer?

No.

When the respective manufacturers are not willing to take responsibility of after-sale or addressing customer grievance once the product is sold, why should banks alone bear the brunt of mis-selling? It should be a joint liability and more so, the primary responsibility of the insurance company or the mutual fund house, which mis-sold the product, not the bank, which was the interface between the customer and the manufacturer

Incentive to mis-sell

It is a known secret how insurance companies splurge on foreign trips and gifts to their banking partners if targets are met. Bank employees, particularly regional heads and relationship managers, are given bonuses and incentives based on the number of products sold and the fee income generated. In short, these non-bank products are sales opportunities and there is a carrot dangling to sell as many products as they can. When sales are incentivised, this is a recipe for mis-selling whether intentionally or unintentionally. While there is a layer distribution problem which the banking regulator has addressed, the point on incentives might be tricky to touch upon because it may directly interfere with how banks do business. But then again, with the genesis of mis-selling not being addressed, anything else which the banking regulator attempts to do is merely a cosmetic solution.

All the regulators, namely, IRDAI, Sebi and RBI, should come together to find a holistic solution to the problem. To blame the RBI alone for mis-selling is like attempting to plaster a textbook solution onto a burning real-time issue. We need practical solutions.