Three costs that a financial product seller must sign off on

Expense Account, Mint

Though I knew the extent of angst against banks as serial mis-sellers of financial products, I was a little surprised at the huge reach-out from readers after the column last week where I wrote about systematic cheating by banks (http://bit.ly/iffYbq) to collect fees and commissions on retail financial products. Apart from sharing stories of being lied to and cheated by banks, readers wrote in to get inputs on what sort of checklist should they ask the seller to sign off on. Of course, implicit in the request is the knowledge that regulatory action will be too little and too late. A specific request goes like this: “Could you make a simple checklist which we can use? We could simply print it out and have the relationship managers sign it when approached.” Says another reader on Twitter: “…practical suggestion—a simple carbon copy worksheet, where employees explain the workings of a scheme. Each retains a copy it can be signed by both. If there is a dispute, each can go back and refer.”

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Banks never sleep, but RBI does

Expense Account, Mint

I wonder why the Reserve Bank of India (RBI) has got its head buried in sand over the extent of lies that bankers tell their customers in their attempt to hit them with inappropriate financial products to earn their bonuses and meet their targets. And I wonder how banks can calmly tell angry customers who protest that the products recommended and promises made by their staff (relationship managers) are not the responsibility of the bank. “The person who sold this to you has moved from our bank, what can we do?” is the most commonly heard excuse to the customer. I recently met an artist at a do. As I tanked up about art, a subject I know nothing about, she reciprocated by asking me questions about financial products. Her story turned out to be the story that I hear over and over again. The average story goes like this: The trusted bank sends its “relationship manager” who knows how much money there is in the account. He usually comes with an insurance company guy. They both sell inappropriate products by lying about product features and what they will return. And when the customer complains some years later, the bank coolly talks about that person having moved on. “And can we sell what you bought and put you in something new now?” And hit the customer with another harmful product.

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Is Sebi getting ready to reload?

Expense Account, Mint

For an industry waiting with bated breath for the new regulator to indicate which way the wind will blow, the two-page circular uploaded on the Securities and Exchange Board of India (Sebi) website on 9 March 2011 (http://bit.ly/fMcM0o) quickly became the most emailed and forwarded document. Through the circular, Sebi has allowed mutual fund houses to use two sources of money to pay distributor commissions. One, they can use the accumulated load balances they are holding. Before August 2009, the loads (the distributor commission embedded in the price of the mutual fund scheme) were collected by the fund house and paid to the distributor. Not all such loads were paid out and the money undistributed was kept in a separate account. The older and bigger the fund house, the larger was this amount of accumulated loads. The circular is being seen in the market as of great benefit to the older, larger fund houses that are sitting on Rs250-400 crore each in these accounts. This is a reversal of the earlier argument within Sebi that was in favour of writing back this money to the scheme (that is to the investors). Two, fund houses can use the money collected as exit loads to pay distributors. Both the steps are being seen as a significant indication of what will happen next. The market now expects the two-cheque system to collapse into one and a gentler easing into the pre-August 2009 world when fund houses looked at the distributors as their primary customers and the real retail customer was not really on the radar. When you can buy the business, why spend energy in developing it?

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