Today as many of you may be aware, that most banks are no longer in the business of mere lending and acceptance of deposits. With rampant financial innovation, they have explored the fee-based income stream by selling third party financial products such as mutual funds and insurance amongst host of others. In fact many of you may have experienced that while you visit you bank to conduct your banking activity, the sales personnel there often try to push you some of these third party products. They often make tall claims and attempt to sway you. But you ought to be careful and take a prudent decision that's meant for you. Remember relationship managers at banks (or even agents and distributors for that matter) are driven by incentives (which make them wealthy), but it is for you to assess the tall claims made by them, so that you don't fall prey to fraudulent activities and feel betrayed or duped. It is imperative to act responsibly as investors.

After the recent cobrapost sting operation on some of the known banks which many of you trust; regulators are contemplating new measures to regulate incentive for banking staff; wherein they may conduct:
 

• An independent scrutiny of sale of insurance
• Prevent recurrence money laundering and tax evasion charges.
   

It is expected that the new rules be pronounced by the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDA). It is likely that IRDA could come up with new guidelines for Know Your Customer (KYC), although in the Union Budget 2013 it is proposed to allow insurance companies to use KYC of banks in issuing policies. As far as RBI is concerned, with rampant mis-selling of financial products, they may ban banks from selling third-party products though their branches.

We are of the view that the unethical practices in the financial services industry has crept in on account of disproportionate incentive based revenue models for sales staff and focus on profit generation, at the cost of quality of advice. In case of insurance, although the earlier high commissions on sale of Unit Linked Insurance Products (ULIPs) have been curbed after dubious sales pitches in the past, traditional insurance policies yet remain a black hole. Likewise in case of mutual fund schemes, high commissions are yet doled out by mutual fund houses when they line-up New Fund Offers (NFOs) in their race to garner more Assets Under Management (AUM). The story is not much different in case of other products such as home loans.
 

We think that while advising financial product especially for investment purpose, apart from making KYC form mandatory, a "financial input form" should also be made compulsory which records elaborate financial details such as the following:
 

• Family details;
• Income;
• Expenses;
• Risk appetite (via a questionnaire)
• Existing assets;
• Existing liabilities;
• Financial goals (which you are catering to viz. children's education and their marriage); and
• Nearness to goals
   

This would enable and ensure that the advice given to the client is prudent and appropriate taking into account the aforementioned factors, which are very imperative while making an investment decision.

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