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My friend Ramesh recently relayed an unnerving account concerning his retired father who lives independently in another city. The latter received a considerable sum upon retirement. Intent on investing these retirement benefits prudently, he visited his long-trusted nationalised bank to explore suitable senior citizen fixed deposit (FD) schemes.
The bank staff successfully persuaded him to ‘invest’ Rs. 10 lakh in a recently launched ‘new and attractive FD scheme’, ostensibly superior to the bank’s traditional offerings. Trusting the institution where he had deposited his earnings for years, Ramesh’s father signed the necessary forms.
While reviewing the investment papers, Ramesh discovered a shocking fact: his father had been hoodwinked into buying an insurance policy. This policy required a Rs. 10 lakh contribution annually for five years before any returns could be expected. Now without an income, Ramesh’s father was in no position to make those contributions. Worse still, non-payment of the subsequent four premiums meant forfeiting the initial Rs. 10 lakh deposit.
When they reached out for clarification, the bank staff coldly deflected responsibility, instructing them to take up the issue with the insurance company directly. The company, in turn, washed its hands of the whole affair by pointing to the fine print of the policy document and the signed proposal form. Ramesh’s father asserted he was misled into signing a blank form under the assumption it was a five-year FD. The insurance company insisted they deal with the bank regarding the mis-selling allegations.
I informed Ramesh that such mis-selling was regrettably common and advised him to escalate the matter to the top brass of both the bank and the insurance company, and also highlight the issue through social media platforms. After a sustained social media campaign and exchange of several emails, the insurance company consented to refund nearly the entire Rs. 10 lakh ‘as a special case’.
There the matter rested until Ramesh read my July 2 article (bit.ly/3JYgyFu) advocating regulation of ‘finfluencers’ (financial influencers). He pointed out the irony of his father, seeking a secure investment avenue for his retirement corpus, being misled by heavily regulated entities. He also questioned how regulating finfluencers would help when investors were drawn to them by the allure of making a quick buck.
Ramesh’s point is compelling. The issue of financial product mis-selling has been widely recognised and censured, including by regulator-appointed committees. A research paper by Monika Halan and others (“Estimating losses to customers due to mis-selling of insurance policies in India”) had estimated Indian investors’ loss from such malpractices at a staggering Rs. 1,50,000 crore.
Worryingly, most cases of mis-selling fall into regulatory cracks. Even though the organisation that provides these services to an investor may be one, grievance redress is split across regulators working in silos. Most investors now adhere to a standard rule: “Never sign any form that a banker asks you to sign.” It is a sad commentary on the profound trust deficit that prevails within the financial sector.
Addressing these issues, an expert committee established by the Supreme Court of India, in response to the Hindenburg Research report, highlighted the prevalence of financial mis-selling and pushing of inappropriate financial products across sectors. It renewed the call for setting up a central “Financial Redress Agency”, first suggested by the Financial Sector Legislative Reforms Commission in 2012, that would work across sectors to address such malpractices.
Truth be told, new-age investors seduced by get-rich-quick promises and misled by finfluencers require regulatory protection. But it’s also crucial to have a centralised agency that transcends regulatory silos and provides redress to investors like Ramesh’s father seeking safe investments. Swift implementation of the expert committee’s recommendation could significantly bolster investor trust in the entire financial market.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor
Twitter: @harshroongta
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
(A slightly different version of this column first appeared in the Business Standard on July 17, 2023)