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Misdirected Solutions Won't Fix Mis-selling

The underlying logic of RBI's draft guidelines on wealth management is substantially

If you go to a doctor with a complaint, then you would expect that the treatment recommended reflects the diagnosis of the disease. Suppose the doctor is one of those silent types who refuse to tell the patient what's wrong but just start the treatment. Even then, you can figure out the disease from the treatment. I mean if he puts your leg in a cast, then you can be sure that he diagnosed a broken leg and not viral fever as the root cause of your troubles. That's a reasonable deduction.

If one applies this principle to the Reserve Bank's recent draft guidelines on wealth management services offered by banks, then one comes up against a puzzle. These guidelines are part of the process that was triggered by the Cobra Post sting where a large number of banks were found to helping customers invest unaccounted money, as well as selling unsuitable products to their customers.

The main points of the RBI guidelines is that bank's must set up separate divisions or departments at arms length for these services so that line banking employees are not selling other products; that employees must not take commissions directly from other companies; banks' boards must formulate policies to address mis-selling, grievance redressal and such. Reading through the guidelines, it becomes quite clear that the underlying narrative is one where employees have been stepping out of line and of bank managements that haven't paid enough attention to prevent these malpractices. Thus, for example, the touching faith in banks' boards to formulate policies to prevent mis-selling, which, by the way, will also be defined by the boards.

But what if it's the other way round. What if, in order to enhance bank's profitability, it's the bank's boards and senior managements that have created incentive structures that encourage mis-selling and aggressive practices? What if employees have been given targets that necessitate sharp practices? In reality, everyone who knows how banks have been functioning know that this is actually what has been happening. That is, everyone except the RBI.