A couple of days ago, there was a news item in a leading business daily about HSBC Bank suspending its financial distribution in order to stamp out mis-selling in its ranks. Although the bank seemed to offer a different version later through a different newspaper, it’s good to see that at least some large distribution outfits showing seriousness about making this business more honest. For too long now, the activity of selling mutual fund investments, insurance policies and portfolio management services has been mired in charges of selling inappropriate products and churning—a term that means repeatedly making a client buy and sell investments to earn commissions.
However, the elimination of mis-selling cannot depend on the voluntary efforts of one or two distributors. It can only come about when the business and regulatory environment changes and makes sharp practices unremunerative. Fortunately, such changes are now finally being implemented in earnest by SEBI and IRDA, the two bodies that regulate the financial product in question. IRDA, for its part, has eliminated the hit-and-run ULIP products that dominated till 2010. There are fresh problems with products that have replaced them but there’s no doubt that on a relative scale, insurance salesmen are forced to sell much more cleanly.
Mutual fund selling too has been transformed in the last few years, and changes made recently have all but closed off the old avenues of mis-selling. Today, the pool of money available to pay sky-high commissions is much smaller. More importantly, if an investor exits before one year is up, then the exit load that the fund can charge from the exiting investor has to be put back into the fund. These measures, coupled with earlier measures, practically eliminate the incentive to churn investments. There are other changes afoot too, including an officially-sanctioned fund-labelling system that will help investors figure out what is what.
Of course, the final responsibility lies with the buyer himself, but that’s a given. Knowledgeable customers and honest distribution can flourish only if the regulatory framework is in place.