JOIN USWhy India needs tougher financial regulators
The Indian financial sector, for years, has been facing a credibility crisis. For a good reason, too. Imagine this: Every middle-class/upper-middle-class person gets a few calls daily from telemarketers peddling credit cards, personal loans, and of course, insurance products. But they are not the only chosen ones. Even former President and then-Finance Minister, late Pranab Mukherjee, once fumed that he was getting four-five calls a day from telemarketers selling home loans. It isn't just about the leaking of the mobile number, which is terrible enough despite applying for DND (do not disturb), but the details of financial status that many of them possess. For example, someone from an X bank will happily ask you to transfer the existing personal loan at a 10 per cent interest rate to another bank at 9 per cent or less. The distrust begins at this stage.
And this distrust only grows over the years. Three to four months before every financial year-end, one is likely to get calls for buying tax-saving products. Many sales pitches, to say the least, are damning. For example, investors are sold unit-linked insurance plans (ULIPs) as fixed deposits with tax benefits. Then, when the stock markets are rising, these ULIPs are sold as mutual funds with tax benefits. Similarly, unsuspecting investors are sold multiple mutual fund schemes with the pitch that new fund offers are cheaper than existing schemes. And brokerages have been known to use investors' money to play in the futures and options markets, yes, without permission.
As people grow older, fears of being fleeced only multiply. There are dreary stories of how insurance agents sold life insurance policies to people suffering from terminal illnesses. The premium is hefty, and so, the commission.
An exasperated mutual fund manager once confessed to the futility of sound financial advice. Once a family friend approached him. She had received a hefty sum from her late husband's provident fund and sought investment advice. The fund manager divided the sum into parts and suggested mutual fund schemes to deploy the money. However, when the lady approached the bank branch, she was coaxed into buying insurance products. Unfortunately, the fund manager came to know about this misadventure after months.
The old lady was awe-struck by agents producing 'magical numbers' through excel sheets. You know the type that says, "Oh, you are 50 years, by 70 you will require X crores and this product will give…." Anyhow, the money was gone by the time she realised her mistake.
Interestingly, there are loads of such cases of mis-selling against reputed and listed companies. But their stock prices seldom take a knock. Why? Investors, even reputed global ones, have the comfort that the cases will go on for years in India without any outcome. There will be some nominal fine in the worst-case scenario that the firm will happily pay and go on with its business. Occasionally, there is some action, such as the sacking of the wrongdoer or even jail. But that is rare, even wishful thinking.
But truth be told, this is not about telemarketers or relationship managers since they have targets and incentives linked to their performance. It's more about the top management of these firms who set astronomical targets for their staff to earn a few rupees more. So there is a need to rein them in.
But that requires more aggression from our financial regulators – the Reserve Bank of India, the Insurance Regulatory and Development Authority of India (IRDAI), or the Securities and Exchange Board of India (SEBI). Cases of mis-selling or impropriety, as soon as reported, should be resolved fast. If proved guilty, the fines should be exemplary – five times or ten times the amount defrauded. Moreover, depending on their history, the wrongdoer should be given just one chance or none.
It's not that the regulators don't impose fines or issue orders. The IRDAI or SEBI do penalise companies regularly. But the amounts don't deter mis-selling or put the 'fear of fines' in the errant firms and their top honchos. Fines of Rs 5 lakh or Rs 5 crore won't deter firms and managements with profits running into hundreds and thousands of crores. Rs 100 crore or more, though, maybe a good start.
Financial frauds happen in other countries, too. But the fines are exemplary. For example, the US Securities and Exchange Commission, in 2020, imposed a total of $ 4.7 billion in penalties and disgorgement – up from $4.3 billion and $3.9 billion in 2019 and 2018, respectively.
A CEO of a fund house makes an important point. While visiting the US a few years back, he met a pension fund manager, a long-time friend, for breakfast. But the fund manager refused to eat. The reason: the pension fund had strict ethical guidelines that fund managers should not accept any entertainment, whether food, drinks or any gifts, from sales-side people. Unfortunately, the CEO was a sales-side person. In India, having lunch with a mutual fund distributor and even allowing them to pay is considered fair game, admits the CEO.
Though guidelines aren't lacking in Indian firms either, follow up is rare unless there's blatant flouting. And are people fined for breaking the rules? Well, that is a different matter altogether.
(The writer is a senior journalist)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.