There is a difference between selling a T-shirt and selling a financial product. Usually it is said that, "let the buyer beware", however, in case of products and services which may require domain-specific competence, sellers can certainly not wash their hands of their responsibility.

Buying an insurance or investment product involves some analysis, which a layman may not be able to perform on his own. When the buyer doesn't have adequate information and lacks knowledge needed to analyse available options on his own, he relies on advisor's opinion. What if a person giving advice works in his own interest rather than in the interest of a person seeking advice? Impact could be long lasting. Although mis-selling is bad in any business, that in case of financial products would have serious adverse impact on one's wealth accumulation.

Finance ministry has been keen on curbing the mis-selling of financial products and rationalising the distribution incentives. The Government had appointed a committee under the chairmanship of Mr Sumit Bose, former union finance secretary on November 20, 2014 to study the matter and give suggestions. The committee submitted its report on August 10, 2015. Now, the Government has asked all stake holders to give their suggestions by October 5, 2015 on the report, before Government takes the final call on the committee recommendations.

Key observations of the committee
 

• On many occasions, distributors of financial products don't provided correct information to the buyer
   
• There have been instances where distributors didn't show the full lay-out of the product on offer
   
• Many distributors don't reveal how much of the contributions of the buyer are diverted towards commissions and costs
   
• Clients are not told about the nature of contract they are entering into
   
• Commission-driven distributors make investors churn their portfolios without any apparent benefit to the investors.
   

The committee report also mentions that, mis-selling happens at any stage of the product-cycle, that is, at the point of sale, post-sales or even at both stages. The most affected segments that receive recurring complaints are insurance, mutual funds and pensions plans. The report further notes that, financial products in India are not actively bought because of low trust in them. Since they have to be pushed, distributors prefer to sell products which earn them high commissions. Moreover, assured returns and tax incentives also give undue advantage to a certain product lines which offer both, yet, have mis-aligned cost structures and are prone to mis-selling. Some traditional insurance plans are the example. Based on its observations, the committee has given a number of recommendations to the finance ministry. Given below are the most important ones from the investors' perspective.
 

• Investment products and investment components of bundled products should have no upfront commissions.
   
• All investment products, and investment portions of bundled products, should move to an Assets Under Management (AUM) based trail model.
   
• Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital.
   
• Regulators should be harsh on manufacturers that are found to be violating the spirit of the cost recommendations by hiding costs paid to the distributors under other heads such as marketing or business promotion. Very stiff penalties and loss of license for repeated offences should be put in place.
   
• In case of mutual funds, the benchmarks should be made more relevant than they are today. Schemes should be periodically tested to see if the asset allocation is conforming to the benchmarks chosen.
   
• Similar schemes from the same fund house should be removed. Some of these were launched in the NFO boom to harvest the 6 per cent marketing cost. Such duplicate funds should be merged with others in the same fund house since they confuse investors
   
• The regulator should put in place a free look policy and define the period for which it will hold for mutual funds.
   
• Upfront commissions for term insurance should continue since selling pure life cover is relatively difficult
   
• In all products, including closed-end and open ended products, other than pension products, the choice of withdrawal should remain with the investor. The regulator should determine a surrender cost that the investor may bear in such products. The cost of surrender should be reasonable. The remaining money should belong to the exiting investors.
   
• Product disclosure should be such that a customer can very clearly understand what it costs (easier to do once the costs of each function are disclosed) and what the benefits are.
   
• Machine readable disclosures enable creation of web-based tools and mobile apps that help consumers make smarter choices in the marketplace and as such all disclosures should be machine readable. Machine readable does not mean soft copy. Machine readable is when data can be processed by a computer for further analysis and interpretation. CSV is a basic example of machine readable
   
• There should be a clear split of the premium, at least for the investor, into mortality and investment for the traditional plans as well.
   
• All new traditional plans should conform to this structure. The older plans in the market can get grandfathered. IRDA should work with both RBI and SEBI to mark its existing pools to the market
   

PersonalFN is of the view that, if Government accepts all important recommendations of the committee, it would be a huge step forward in introducing financial sector reforms. The recommendations of the Sumit Bose committee are comprehensive in nature as they touch most of the important aspects of financial products, right from the product structure to distribution incentives and disclosures. The attempt has been made to bringing similar financial products on par, taking away the disproportionate benefits available to a particular product category.

PersonalFN has always believed that, there is a need to educate investors in order to improve penetration of financial products. PersonalFN has worked incessantly on various platforms to educate and empower investors. It remains to be seen, how many recommendations of the committee see the light of the day.

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