All banks will now have to ensure that the selection of third-party issuers of financial products, such as insurance and mutual funds, is done in such a manner that it takes care of reputational risks. While the customer must be made aware of the referral service, the third-party issuer should adhere to regulatory guidelines and banks to relevant RBI norms.
For portfolio management services (PMS), only banks that can provide such services on their own can undertake them and funds accepted for portfolio management from own clients should not be entrusted to another bank for management.
Similarly, a bank?s own investments and those belonging to PMS clients should be kept distinct from each other and any transaction between the bank?s investment account and client?s portfolio account should be strictly at market rates.
These, among others, are part of draft guidelines by Reserve Bank of India (RBI) on wealth management, marketing and distribution services offered by banks. The guidelines have been issued in the wake of allegations that certain banks were involved in structuring transactions to aid tax evasion and fraudulent transfer of funds. Comments on the draft guidelines can be mailed to the central bank by July end and, after an analysis, the RBI will file the final recommendations.
In the bank?s general ledger, a ?client?s portfolio account? should be maintained and all funds received by it for portfolio management should be reflected on a day-to day basis. The balance lying in this account should be treated as outside borrowings of the bank; and the bank should maintain cash reserve ratio/statutory liquidity ratio on such funds.
The draft guidelines underline that banks should take greater care in services like selling insurance products where misselling is most rampant. Actually, the agency model for marketing and distribution of third-party products is without risk-participation as the sales are done on behalf of the issuer of third-party products.
?Misselling of products and services occur when products that are unsuitable to the client profile are sold to him, particularly through misrepresentation or by linking it with banks? own products (like) making purchase of insurance compulsory along with a car loan. Misselling can arise from lack of knowledge of the product sold, and occurs when untrained staff sell products,? say the draft guidelines.
The churn in agency distribution of private life insurance companies has been high ever since the Insurance Regulatory and Development Authority (Irda) came out with a host of regulatory changes in 2010. Companies are now working on bancassurance as banks can channel savings into insurance products, especially single premium products that are linked with credit products such as home loan. However, analysts say bancassurance can lead to misselling as it fails to deliver risk- and need-based products that require personalised service.
The draft guidelines also suggest that banks put in place a policy approved by their board regarding marketing and distribution of third-party financial products, which should consider the issue of addressing misselling. Also, products should be marketed only in branches having trained personnel and persons involved in marketing and distribution services should not be entrusted with any other approval or transaction process at bank branches. The fact that a bank is working only as an agent should be clearly brought to the notice of the customer.
Banks will have to strictly adhere to all know-your customer guidelines and transaction above R50,000 for these products should only be accepted through debit to customer account with the bank and not in cash or cheque of other banks.
?There should be no evasion of these regulations by accepting several amounts for lower values from the same client to avoid the threshold,? the draft guidelines note.
Banks will have to put in place a robust customer redressal mechanism, which should form part of the board-approved policy and this will be irrespective of the nature of the services offered like sale of third-party products, advisory, referral or fund management.
Also, banks will have to put in place internal control mechanisms and systems to check operational risk. Banks should charge a definite fee for the services rendered, independent of any benefit or losses incurred by the client on account of acting on the advice of the bank and it has to give a suitable disclaimer in the regard.
