In a move to stop mis-selling of any financial product - be it insurance, mutual fund, pension fund or any such products alike - a Government panel has tipped of all financial regulators like Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA) and others under which companies use wrong disclosure forms to dupe customers for their individual business growth. The panel has suggested some customer-friendly recommendations for all concerned companies and manufacturers to follow proper disclosure norms to avoid mis-selling of their products in the market.
Financial mis-selling refers to deliberate false statement made by individual or company, usually a financial organisation representative to sell off their products or services usually not profound to the customer. For example, selling life insurance to someone who has no dependents is regarded as mis-selling.
A report by the Sumit Bose Committee, headed by former Finance Secretary Sumit Bose, said Indian markets should be guided to an advisory model, in which customers sought advisors and remunerated them directly for holistic portfolio advice. "Regulators should be harsh on manufacturers that are found to be violating the spirit of the cost recommendations by hiding costs paid to the distributors under other heads such as marketing or business promotion. Very stiff penalties and loss of license for repeated offences should be put in place," the panel report said.
In response to the panel report, a Government official in the Finance Ministry said, "Regulators focus should be on better disclosure so as to eradicate mis-selling. For instance, any Asset Management Company (AMC) should be directed to start contacting each and every first time equity investor, to start with, to confirm if they have been apprised of the risk associated with the scheme."
"The customers should be given the choice to exit without any load if not advised properly. This will automatically stop mis-selling because investors exit would be a loss both to advisor as well as AMC," the official added.
Currently, MFs are allowed to charge an additional 30 bps or 0.30 per cent to the total expense ratio if 30 per cent of the fresh fund flow is from B-15 cities. However, the Bose panel recommendations on this said that the MFs and distributor should tap such unexplored markets on their own to increase sales and market share.
"It is very difficult to sell the MF products in B-15 cities, and, hence the incentive given by SEBI which has helped us to increase our penetration in the B-15 cities. Now, our job will get tough while selling our products in B-15 cities in case the incentive was scraped. Before taking a final call on this matter, we are waiting for the fallout of the AMFI's forthcoming meeting on September 16," said a fund house Chief Executive Officer (CEO) on condition of anonymity.
While the Bose panel said the SEBI's norms for mutual funds and the IRDAI's rules pertaining to unit-linked plans (UlIPs) were robust, it added these principles should govern the surrender and lapse costs for traditional plans and form the basis for future products.
"Product disclosure should be such that a customer can very clearly understand what it costs (easier to do once the costs of each function are disclosed) and what the benefits are. Returns should be disclosed as a function of investment and should disclose the internal rate of return (IRR) of the product," the report said.
For example, returns should not be shown as a percentage of sum assured. Net asset value (NAV) should reflect the value of investment which would allow the consumers to take the point to point NAV and arrive at net investment returns, according to the report. "How much of the invested amount goes to work and how much is cut as a cost should be clearly disclosed in a manner that is understandable by a retail investor," it said.
For closed-end products with a defined tenure, it added, the customer should be made aware of the consequences of a mid-way exit from the product. As an example, if a 15-year endowment plan is discontinued in year 8, the disclosure material should clearly show what money will return to the investor after such a period. In a 5-year closed-end mutual fund, the investor should clearly be told that a midway exit in year 3 is possible only through the secondary market where the NAV is always lower.
However, the official added, "Regulators must look into the fact that these products are sold primarily by individual agents in retail space. Therefore, commission should be good enough to eke them out a living otherwise large portion of the population will be deprived of the benefits of these products. Insurance, owing to its remunerative commission structure, has reached to the larger percentage of population than the MFs."
The Bose panel further believes that consumer interests will be served by more transparent disclosures that enable consumers to understand products, compare them, and consequently choose those that serve their interests. Certain product categories have a larger focus in the eyes of the panel so that they are brought to par with the rest of the market. "The endeavour of the panel is to ensure that there are no dark patches in the industry or product category that leads to mis-selling and investor anguish, resulting in loss of trust in the financial sector," the report said.