In the last couple or more number of years, as many of you may be aware - and may have encountered, that there have been horrendous instances of mis-selling of by banks, especially in the segment of Wealth Management Services (WMS) which include:
 

• Referral service;
• Investment Advisory Services (IAS); and
• Portfolio Management Services (PMS)
   

While there has been vigilant regulation from both the capital market regulator (i.e. the Securities and Exchange Board of India) and the insurance regulator (i.e. Insurance Regulatory and Development Authority) on this, the Reserve Bank of India (RBI) has also issued kept a vigil. But with the expansion of the roles and responsibilities of banks as providers of WMS (which includes the marketing and distribution thereto), the RBI has proposed to fortify norms intended at segregating activities of banks involved in WMS into sales and advisory.

In the draft guidelines on 'wealth management/marketing/distribution services offered by banks', RBI has said, "conflict of interest arises mainly from the juxtaposition of the marketing/distribution function and the advisory or funds management function. To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory/fund management as well as marketing, it is proposed to segregate the two functions. "Moreover, the draft guidelines also mention that banks intending to offer WMS need to seek RBI's prior approval and would also need to comply with SEBI's guidelines regarding provision of these services.

For sales personnel who are more often are interested in increasing their variable pay rather keeping the interest and objectives at the forefront; the central bank has also prescribed a code of conduct and emphasised on training. And in case if any mis-selling does occur despite such measures, the RBI has proposed that bank should set up robust internal grievance redressal machinery.

Taking learning from cases of the past where investors' hard earned money has been allegedly swindled by employees of reputed banks, the central bank has mentioned in its draft guidelines that transactions over Rs 50,000 for these products should only be accepted through debit to customers account with the bank and not in cash/cheque of other banks; thereby attempting to preclude instances of fraud. Likewise citing instances of compromise on Know Your Customer (KYC) norms, RBI has asked banks to strictly adhere to them (KYC norms). Attempting to infuse transparency in WMS transactions, the draft guidelines also ask banks to disclose to customers details of all the commissions or other fees (in any form) received, if any, from the various mutual fund/insurance or other financial companies for marketing their products.

PersonalFN is of the view that by bringing the aforesaid draft guidelines, the central bank is endeavouring to do away with the conflict of interest between the marketing and advisory/ financial management function, which risks the banks to reputational risk. By separating the nexus between sales and advisory, the intent of curbing mis-selling is evident. But what PersonalFN also feels is that, the quality of the advice also matters and goes a long way while you aspire to achieve your various financial goals.

Disallowing cash and cheques of other banks for transaction in WMS over Rs 50,000, RBI wants to ensure better risk management system and disclosure of commission to customers would help infuse transparency.

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