Mis-selling is easy because the rules are not uniform
Sucheta Dalal Sunil Parekh, trustee of the Consumer Education & Research Centre (CERC), Ahmedabad, returned from a global, once-in-four-years summit of Consumer Union International at Hong Kong and reported that the single biggest concern for consumer groups all over the world is mis-selling of financial products. On 7th January, at a multi-disciplinary workshop of the ministry of consumer affairs with CERC on “Consumers and Misleading Advertising”, most participants seemed shocked at the lack of regulations and disparity in advertising standards between various financial regulators. This creates a fertile ground for mis-selling. Again, on 17th January, at a Moneylife Foundation workshop on Right to Information (RTI) and its applicability to the financial sector, it was evident that savers found it tough to grapple with changing rules in a deregulated environment. They didn’t understand that financial products and services, hard-sold through glamorous advertisements, carry steep charges and commissions, which are hidden in the fine print and change in a jiffy. Why does this happen? Clearly because of poor oversight by the finance ministry. Each financial regulator operates like a sovereign entity, although the entities they regulate are deeply intertwined through common shareholdings. Also, their products are similar and they have market relationships stretching across regulatory jurisdictions. For instance, HDFC Bank and its parent mortgage finance company are regulated by RBI (Reserve Bank of India), but its mutual fund and insurance entities are regulated by SEBI (Securities and Exchanges Board of India) and IRDA (Insurance Regulatory and Development Authority), respectively. The Bank sells mutual fund and insurance products to depositors for a commission. Yet, not only are the regulators separate, but they have different rules. For instance, while SEBI disallowed celebrity endorsements in the 1990s, IRDA and RBI don’t. So ICICI can have superstar Amitabh Bachchan selling insurance to airport security staff, but he cannot sell them mutual funds.
Cricketing god Sachin Tendulkar can endorse a bank, but not an initial public offering (IPO). Television advertisements for mutual funds will have a disclaimer about market risk, with SEBI specifying its font size and a mandatory readability requirement of six seconds. On the other hand, the talented actor Irfan Khan can persuade you to buy more insurance without having to tell you about commissions, charges or the rejection rate of claims. There is plenty of global research to show that ordinary people are simply not hard-wired to understand financial products and, hence, easy targets of scams. Yet, despite a high-level coordination committee of financial regulators, which includes the Union finance secretary, there are no cohesive rules.