India Moves Against Mis-Selling Of Wealth Management Products

Tom Burroughes

1 July 2013

India’s central bank and financial regulator is proposing rules to prevent mis-selling of wealth management products, such as split the process of approving sales to clients from a firm’s marketing efforts, following recent investigations that unearthed unethical behaviour.

The Reserve Bank of India says banks will need to create a subsidiary or a separate division to conduct wealth management services, according to draft guidelines.

“Banks are allowed to market insurance and mutual fund products as agents of other entities on non-risk participation basis. It has been observed that in some cases, banks did not have clear segregation of duties of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products. Such practices may lead to mis-selling and distortion of the staff incentive structure,” the RBI said on its website.

The central bank proposes to advise firms to take the following steps:

-- Ensure that the marketing function and the approval/transactional process at bank branches are segregated;

-- Ensure that its employees do not receive cash/non-cash incentives directly from insurance companies, mutual funds and other third-party product providers;

-- Have a board-approved policy to avoid mis-selling and conflict of interest in marketing and distribution of own or third party financial products.

The RBI said it investigated the issue amid reported allegations that certain banks were involved in structuring transactions to aid tax evasion and fraudulent transfer of funds.

“The investigations revealed the need for better regulatory compliance by banks,” it said.

For the purpose of the new approach, the RBI explained that “wealth management services” generally include referral services, investment advisory services and portfolio management services.

“In India, banks with well-developed branch network have access to a large customer base. Banks offering wealth management services are exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity about products and frauds,” it said.