Apple or Toyota of retail finance? Impossible!

The other day I got an email from one of our readers saying: “I want to bring to your attention how bogus these online term insurance plans are. I have paid a premium of Rs 11,000 for a term insurance policy and agreed to medicals. After the tests they have increased my premium by 100 per cent, stating I have elevated high blood sugar levels. I know this is false, as I have undergone two medical tests, which didn’t show the elevated sugar levels. I have got a term insurance from another company recently and they have not said anything about blood sugar levels. Also, a month back, as part of company benefits, I got a complete health check, and all my parameters including fasting sugar levels are normal. I am a healthy 27-year-old male, with no smoking and occasional drinking — which I have declared. My monthly gross salary is Rs 2 lakh and I have a normal desk job in an IT park… Online term plans are nothing but a trick to pay for a reduced premium by then jacking up the price by 100 per cent claiming that the proposer has some medical issues which are false.”

We get many such emails every week. And not just about life insurers, but health insurers, stockbrokers, bankers and other financial services companies. Frustration and anger about regulators are common as well. Disputes between customers and companies are rife, and despite the presence of a regulator, customers are forced to walk away shortchanged. That sets you thinking. For computers and cellphones, we have Apple and Sony; for cars, we have Toyota and Mercedes-Benz. Why isn’t there an equivalent to these companies for retail financial products? This is a global phenomenon, but why? After all, financial products are not all new. In fact, it is the cellphone market that is only a few decades old, while financial markets are as old as the hills.

The fact is that durables are backed by science, and are constantly improving. One product may be different from another in features and price; but no matter what we select, we can expect them to perform. If they are defective, they can be replaced. This is because competition works. Financial products, in contrast, are not constantly improving. They are often backed by craft and commissions. Competition may not work. We simply cannot say that all of them work; in fact, most of them don’t. They are rarely replaceable. We trust the manufacturers of durables because of their reputation. The reputation of financial services companies is usually among the worst. And so, durables don’t need strong regulation.

The key difference between these two sets of products is that Apple, Sony and others sell tangible products that offer instant performance. We can see what we are buying, compare them physically — and even test them before we buy. Financial products are intangible, carrying only promises. Shop assistants (whose main income is a fixed salary) have a limited role in selling durables. They guide you to the right section, and explain the features of competing products. They cannot lie outright. Producers of financial services, brokers, agents and so-called relationship managers, who earn commissions on each sale, often play a major role in guiding you to the more harmful choices.

Finally, durables are a product of complex engineering, but you don’t need to know any of it to enjoy them. All financial products demand some technical knowledge to make the right choices. For all these reasons, financial products need close regulation; unregulated, they are a complete menace

All these facts are unchangeable and explain why excellence in financial services is nearly impossible. Too many companies will design products that are complex, harmful, and sold with high-pressure tactics — after which the customer can run from pillar to post to have his problems redressed. Sounds too bleak and cynical? Well, the faster we wake up to this fact, the better for us.
And once we do wake up, what are the implications? One, you cannot really trust the producer or the distributor. Most of the complaints we receive have a familiar refrain: “But I trusted him… (bank manager, distributor, agent).” Two, brand names mean nothing. We know what happened to AIG in the US and (twice) to UTI in India. Three, both manufacturers and distributors may be unethical, working mainly for commissions. Even when they have your best interests at heart, they may be ignorant or incompetent or floating from one job to another.

So, when it comes to buying financial products, clearly we have to do the hard work ourselves. But then most savers don’t have the time, interest and skill — and get gypped repeatedly. And after that, disgusted, they conclude that bank deposits, “money-back” insurance policies, and annuities are the safest products, if not the smartest, and thus serve their purpose fine. Meanwhile, mutual fund sales decline, as does the insurance business; stockbrokers have dwindling customers; and regulators wonder about their “developmental” role.

Hopefully, the smart people heading hundreds of financial services companies know what is wrong and where. But are they capable of changing anything?

Regulations around savers, please

Life insurance products and mutual funds have overlapping features, since insurance companies mainly want to sell their products as wealth accumulation aids. Life insurers today are training their staff not to talk of selling policies in the first meeting; they are supposed to talk of “meeting all your financial needs” such as education, marriage, retirement and so on. Mutual fund companies are less aggressive. But they are also selling something that is theoretically supposed to fund your education, marriage, retirement and so on. Both the products can be sold by banks or individual agents. But the rules for insurance (written by the Insurance Regulatory and Development Authority, or Irda) and those for mutual funds (framed by the Securities and Exchange Board of India, or Sebi) are as different as chalk as cheese. Consider this:
• Selling insurance fetches the agents commission. Selling mutual funds fetches distributors much less, at least at the current volumes.
• Insurance, which is the far more complex of the two products, can be endorsed by Amitabh Bachchan and Sachin Tendulkar. Mutual funds cannot be endorsed by celebrities — though both may invest in bonds and equities. If Tendulkar is bad for a simpler product like mutual funds, why is he good for a complex product like insurance? Is it because nobody would buy insurance if a celebrity did not endorse it? An even bigger issue: in that case what is the difference between Tendulkar endorsing insurance that promises to take care of your children’s education, and Priyanka Chopra endorsing skin cream that “removes dark spots”? In the second case, you are being fooled as a consumer — in the first, you are being fooled as a saver even though there is an active regulator.
• While selling an insurance product a saver gets to see “benefit illustration”. Though flawed in the way it is done now, it performs a vital and unappreciated role. It offers some basis to buying what is essentially a product we cannot touch, feel and instantly assess. As I discussed in one of my previous columns, the difference between consumer durables and financial products is core reason for mis-selling (and mis-buying). The “benefit illustration” partly addresses this problem. While the instant gratification and the sense of satisfaction that comes from the right consumer purchase can never be replicated for financial products, one still gets a sense about the future. Mutual funds are not allowed to show benefit illustrations, even if they are selling a child plan — which makes the fight against Tendulkar’s and Bachchan’s endorsements tougher still.

The products and the selling process in both cases are supposedly created and designed with you, the saver, in mind. But are you in the picture at all? Especially after you add a third major player and its regulator to the scene — banks and the Reserve Bank of India (RBI). Anecdotal evidence shows that among the biggest sources of mis-selling are banks — possibly because they enjoy the trust of the savers, have access to their data, and are large impersonal organisations.

This makes it easy for a bank in Vizag to sell a life policy to a 70-year-old while issuing it in the name of his 65-year-old wife, since a 70-year-old is not supposed to buy a life policy (this is a real story, which you can find on our website). For an anti-consumer transaction like this, it is not just the insurance company (which does not use celebrity endorsements, but nevertheless asks you to live with your head held high!) that is responsible, because its sales guidelines should specify what not to be sold to whom. It’s the bank, which abused a senior citizens’ trust. Clearly, there is something terribly lopsided in the way regulations have developed around products and companies rather than around customers. As of now, the regulators are talking over your head, working at cross purposes, sometimes protecting the sector they are supposed to regulate.

What needs to be done? We need harmonised rules involving the RBI, Sebi, Irda and other agencies. They used to have a forum to meet and harmonise things – the high-level coordination committee (HLCC) for financial markets – where all the regulators, as well as the ministry of finance, were present. They never talked about anything with the savers in mind. HLCC is now disbanded. In its place has come the Financial Sector Legislative Reforms Commission (FSLRC), which has the same character as any other government committee or board. None of its members, except Mr P J Nayak, has had anything to do with savers, certainly not with the practices on the ground that affect them. That is the least of their problems and concerns. FSLRC has set up working groups on various issues, but none of them would improve the lot of savers. I wonder whether any of them in the working group even knows that the RBI is highly protective of banks even on the issue of mis-selling!

Who will speak for the savers? That job ideally has to be done by regulators and the ministry. But regulators and policy makers usually talk to companies, not to distributors. The decision to ban entry load was taken by a Sebi chairman without serious consultations with anyone. There is simply no way in which a regulator interacts with savers and hears their issues. On the other hand, there is an active ongoing interaction with financial services companies, and so availability bias and recency bias take over the behaviour of the regulators — available and recent issues dominate their minds. Maybe the ministry has to step in to create a mechanism whereby savers’ issues get more attention than that of any other interest groups. Otherwise, savers will continue to be made suckers by the very regulatory process that is supposed to help them.



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