Fixing mis-selling

Retail investors buying into risky products and burning their fingers has been the inevitable corollary to every large financial institution collapse and scams in India. But the regulators’ standard response has been to write new rules on product disclosures or to formulate toothless codes of conduct for intermediaries. Concrete enforcement action against intermediaries found to have deliberately misled investors, is rare. This is why it was good to see Securities Exchange Board of India (SEBI) quickly conclude its investigations on the mis-selling of YES Bank AT-1 bonds and impose monetary penalties on the bank and its wealth management staff last week.

SEBI’s investigations found that YES Bank’s wealth managers helped institutional investors offload the bank’s AT-1 bonds to its retail customers by pitching these perpetual bonds as ‘super FDs’ without highlighting their risky features. Several customers broke their fixed deposits to make the switch relying on verbal pitches that highlighted the high rates on AT-1 bonds. Wealth managers seem to have skipped sharing term sheets, or conducting risk profiling or suitability assessments of their clients. Bank personnel have argued in their defence that they didn’t receive any direct commissions from the bond sales and that client risk profiling was not mandatory. As the AT-1 investors were high net worth individuals, they were assumed to have understood the risks. These arguments have lessons for investors, no doubt. Financial market regulations in recent years have focused on expanding the risk disclosures in the documentation accompanying financial product sales. But even HNIs still seem to be prone to making their purchase decisions based on verbal assurances of agents, not taking time or effort to read through the official documents accompanying every application form. Regulators can fix this by requiring the intermediary and the investor to sign off on client suitability assessment on a one-pager detailing risks on every product sale.

Regulators on their part, need to introspect why so few cases of mis-selling attract deterrent action such as fines or de-licensing of intermediaries. If the difficulty of proving such cases is the reason, establishing a paper trail can help. But turf issues between regulators also cause many cases to slip through the cracks. While SEBI has drawn clear red lines between commission-earning distributors and fee-based advisors for mutual funds, RBI or IRDA have done little to prevent bank staff motivated by pay-based incentives from pushing unsuitable products to their captive clients. Financial regulators also need to shed their lackadaisical attitude towards promptly taking up investor complaints lodged through official channels. The Government must perhaps expedite the unified portal for investor complaints mooted in the Budget.