Misselling in Financial Services – Who Will Raise Flag?

In the last week, I got an invite in the afternoon by an office colleague for attending a presentation by a financial intermediary. Being an avid researcher I thought let us attend the same. I found that a person from a reputed financial institution was explaining past returns on various mutual fund products to people assembled in the room.  He was showcasing as if past returns are indicator of future returns in Mutual Funds.  People in the room (most of individual investors) were anxious to curtail tax and want more returns.  Very often in the months of January, February and even march of any calendar year, financial institutions and their employees come up with great sales pitch to lure customers. Often they missell product to earn more commissions and incentives.

Misselling is the deliberate, reckless, or negligent sale of products or services in circumstances where the contract is either misrepresented, or the product or service is unsuitable for the customer’s needs. 

Researchers have shown that between 2005 and 2012, Indian investors lost up to $28 billion on account of mis-selling of unit-linked insurance plans. Just imagine number if you consider misselling in other financial products.  The moot question here is

Can companies, regulator able to stop / curb misseling?

Answer is definitely yes, especially in this data driven world.

Data analytics has touched to lengths and breadths our financial lives from the taxation, fixing insurance premium, credit analysis, algorithm based funds and even a robo advisors. Even our Government is increasingly using digital and data analytics tools in e-Governance, tax collections, etc. Efforts of linking Aadhar across investment products, mobile numbers will enable them to do it extensively (It’s better not to express much on this as the matter is subjudice). Corporate entities are now data driven. Today data analytics is not only part of marketing function but also gently disrupting the way recruitment, training, logistics and operations processes.    Data analytics and algorithmic tools would certainly curb or minimize misselling practices. Probably financial institutions are not keen on this because at the end of the day any business (through ethical as well as unethical business) welcomed. Then…

Why no one is keen to curb misspelling practices across all financial products?

Financial institutions are the beneficiary of this phenomenon so they will not act. Rather they are busy in coining innovative ideas to incentivize channel intermediaries. Regulators do not have time as they are fighting with each other over their jurisdiction (e.g. MF Vs ULIP row between SEBI and IRDA).

Who will compel government to come up with stringent regulations against misselling?

Meanwhile, writing on the wall for small individual investor is “learn the art and science of investing or continue to miss wealth creation opportunities in the hands of mis-sellers”

By the way is there any one whispered about “investor education cess” on tax payers?

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