Banks continue to mis-sell: Here's what you should do







Autoplay Autoplay 1 of 5 The mis-selling continues ET Wealth went undercover and found that bank executives continue to mis-sell insurance and other financial products. And many of us buy these products without knowing whether these fit our investment portfolios and end up with dud investments.



Here is a look at what you should do if you are mis-sold a product.



Text: Narendra Nathan/ET Bureau Insurance Since mis-selling is rampant here, the insurance regulator has kept a free look period of 15 days and some companies offer up to 30 days. Do keep in mind that this free look period is not from your date of application, but from the date you receive the policy document. If you have been mis-sold a policy, say a unit-linked insurance plan (Ulip) or an endowment plan, you can return it within the prescribed free look period. Balanced mutual funds If you have been mis-sold balanced funds, immediate redemption will be a problem because most funds charge an exit load of 1 percent, if redeemed before one year. However, if your equity exposure has gone up significantly due to the balanced mutual fund, you have no option but to redeem it and bear this exit load hit. Fixed deposits If you are mis-sold a fixed deposit (FD), premature withdrawal is the best solution. Since most banks charge just a small penalty on the interest-the interest you get will be lower than contracted for-the chance of capital loss is less. However, you will be stuck if the mis-sold products are deposits from non-banking finance companies (NBFCs) because most of them don't offer premature withdrawals. And the ones that offer it, allow so only at quarterly intervals and also charge FD closure penalties of 1-3 percent. Gold bars/coins Here, immediate selling won't be a good solution because the impact will be huge. Jewellers offer 5-10 percent less than the market price if you sell gold bars/coins to them and insist on money and not accept their offer of exchange for ornaments.

Product: Customer's request RM's suggestion Why it is mis-selling Impact of mis-selling Fixed deposit: Wants to invest in an FD with monthly interest option. Invest in balanced funds instead as they'll earn you higher income. The returns from balanced finds may be higher, but the risk they carry is also higher and the bank does not highlight this fact. Also, monthly dividends cannot be guranteed. As dividends are not guranteed, you may be in for a shock if you pick balanced funds for monthly income. Also, dividends come from the fund’s NAV and if the fund continues with dividends in a falling NAV scenario, you may end up with a capital loss.

Product: Customer's request RM's suggestion Why it is mis-selling Impact of mis-selling Senior Citizens’ Savings Scheme:

Wants to invest Rs 15 lakh in the Senior Citizens’ Savings Scheme. PSU Bank: Invest in an FD because only people above 60 can invest in SCSS.



Private bank: Invest in a Ulip with us as only PSU banks can offer SCSS. People above 55 can also invest if they are retired or have taken VRS. Private banks can also offer SCSS. You will lose the interest rate differential between normal FD and SCSS. And as Ulip carry higher risk, they are not suitable for retired people.

Product: Customer's request RM's suggestion Why it is mis-selling Impact of mis-selling Term insurance: Wants to purchase term insurance. Private, foreign bank and PSU banks: Invest in a Ulip as it offers better returns. Insurance is meant to cover risk, and not generate returns. This fact cannot be sidelined by banks to push Ulips or endowment plans. The premium for the Ulip insurance cover will be very high compared to that of term insurance premium, and the cover offered will be inadequate— much less compared to a term plan.

Product: Customer's request RM's suggestion Why it is mis-selling Impact of mis-selling Gold bonds: Wants to invest in gold bonds. Private, foreign, and PSU banks: Buy gold coins instead as gold bonds come with a lock-in period. Gold bonds do not have a lock-in. Though they are not very liquid, the bonds are listed and traded in the secondary market. You will lose interest during the maturity tenure that comes from gold bonds. Also, when you sell the gold coins, jewellers are likely to pay 5-10% less compared to their market price.

Product: Customer's request RM's suggestion Why it is mis-selling Impact of mis-selling Bank lockers: Wants to take a bank locker. PSU Bank: We have limited number of lockers, but you may get one if you start an FD with us.

Private Bank: We have limited number of lockers, but you can get one if you buy a Ulip from us. Forcing customers to buy other products to get a locker is not allowed. Investors will lose out by investing the money in FD—low yield, tax-inefficient— or Ulips that deduct mortality charges— as they can invest the same amount in mutual funds. Besides likely higher returns, mutual funds also offer better liquidity.

ET Wealth went undercover and found that bank executives continue to mis-sell insurance and other financial products."Balanced funds can offer better returns of around 1% per month in the form of dividends,” said the immaculately dressed, senior bank official. I had told him that I wish to invest Rs 10 lakh in a fixed deposit with monthly interest payouts. I wanted a safe option that could offer me assured returns, but the bank official believed a market-linked, risky product with no surety of monthly flows— dividends, after all, are not guaranteed—was better suited to a 55-year old than a fixed deposit. Clearly, he was hiding the truth. But so was I, because neither I am 55 and nor do I have any intention of investing in a fixed deposit. This was just a mystery shopping exercise to gauge the extent of mis-selling by bank executives. If someone makes a misleading or false statement about a product, it tantamounts to mis-selling, as do omitting or concealing material facts and associated risks about an investment product.I visited branches of several banks, including PSU outfits, foreign banks and new generation private banks. The good news is that mis-selling has reduced in recent years. It was far more rampant when ET Wealth conducted a similar exercise a few years ago.However, the modus operandi has not changed. Bank officials still try to mislead people into buying products they don’t need. The bank manager continued pushing balanced funds, even after I pointed out the risks and the possibility of the funds stopping dividend payouts. “These schemes have accumulated high profits and, therefore, there is very little chance of them stopping the dividends,” he asserted. The commission-conscience manager carefully avoided mentioning that dividends come from the mutual fund’s NAV, and if the fund continues paying dividends when the NAV is falling, the investor is likely to end up with losses. He was probably doing so because banks set stiff sales targets for relationship managers, forcing them to push products that fetch higher commissions instead of investments that suit the investor’s needs.Most of the mis-selling happens at foreign banks and new generation private sector banks. The relationship managers are trained to stonewall any question from the customer. When I wanted to invest Rs 5 lakh in a fixed deposit in a foreign bank, the salesperson started pushing FDs from NBFCs. “The interest rates offered by these deposits are much higher than what our bank offers,” she said. What about the risk, I asked. Without batting an eyelid she said the FDs she was offering were from ‘reputed’ NBFCs and there was little chance of default. This comes right after the IL&FS fiasco.To be fair, not all bank employees are bad apples. I went to the local branch of a new generation private bank to invest Rs 1.5 lakh in a tax-saving fixed deposit. This was the same bank that had tried to push balanced funds as a substitute for fixed deposits with a monthly payout but the response was the polar opposite. The relationship manager at the local branch immediately started the process to book my fixed deposit. When I told her that I need some time before making the actual investment, she showed me how to complete the process online on my own. The co-operative bank I visited next with the same request was also helpful.But, when I visited a large PSU bank branch, instead of handing the FD form, the man at the counter took me to the RM. The RM started pushing for Ulips. Her reasoning: “You need to invest Rs 1.5 lakh every year to get Section 80C benefits and, if you invest it in Ulips for five successive years, and stay put for the next five years, you will build a corpus of at least Rs 15 lakh.” Not only will I be doubling my money, unlike FDs, where the interest is taxable, earnings from Ulips will be tax free, she pointed out. This was mis-selling at its worst. Ulip is a market-linked product and oral assurances of guaranteed high returns are meant only to trick people—the RM refused to give the ‘high returns’ assurance in writing because rules bar insurers from guaranteeing returns. Also, though this doubling of money argument looks enticing, investors should note that it will happen, if at all, after 10 years, so the real return (computed using IRR method) works out to be just 9%.Banks were found pushing sub-optimal, or risky products—most common was the push for Ulips—as a substitute to not just FDs but to the Senior Citizens’ Savings Scheme (SCSS), term insurance and gold bonds. Even granting bank lockers was subject to preconditions—investing in FDs, opening a savings bank account, buying insurance. Here’s an account of what the banks pushed for when asked for specific products:After having introduced myself as a retired 55-year-old, I inquired about opening an SCSS account at a PSU bank. The staff gave the necessary information. The second PSU bank I visited, however, denied handing me the form, citing my age. “Only people above 60 can invest in the SCSS,” the official said. This was factually incorrect. People who are in the 55-60 age bracket and have retired can invest in SCSS. When I approached an old generation private sector bank, which has changed its name and become aggressive, aping new generation banks, the relationship manager said that SCSS is offered only by PSU banks. Again, this was factually incorrect. Private sector banks are allowed to offer the scheme. The RM said so because his bank did not offer SCSS. The alternative he suggested was quite outlandish to say the least: “Invest in a Ulip for five years and then invest the corpus after five years in SCSS. Ulip returns appear low now because of the recent stock correction, but will be much better (compared to current historical returns) in the future.” I chose to leave.The RM at a large, new-generation private sector bank began by explaining to me the details of a term plan, brought in Ulips in the discussion and and then started pushing for them: “While you will lose money in the term plan, with Ulips you get your money along with good returns. Our Ulips have delivered 14-15% return and, there are instances where they have delivered returns up to 21%.” When I asked about their exposure to equities and the risk they come with the response was: “Your dedicated RM will shift the investment between equity and debt (move out of equity when market falls and will come back to equity when market rises), so there is no risk involved here.” That’s a patently false statement. No bank RM can switch funds between equity and debt and make Ulips risk-free. A foreign bank too attempted to sell me a Ulip when I had expressly asked for a term plan.I approached a large PSU bank to apply for an ongoing gold bond issue. However, the staff started pushing gold coins instead. “There is a lock-in period in gold bonds, sir. But with gold coins, you can sell or get ornaments whenever you want,” he said. Not correct. There is no lock-in in gold bonds. Though these gold bonds come with a specific time period—investors get the value of gold upon maturity— they are listed and traded in stock exchanges, so you can sell them whenever you want. However, these bonds are not traded actively, so it is best to buy them from the secondary market where they are available at a discount. Two new-generation private sector banks I approached also pushed gold coins. Don’t fall for banks pushing gold coins. Bonds are a better product for investors. While banks sell gold bars and coins, they don’t buy them back, forcing investors to sell them at lower prices to jewellers. The main advantage with gold bonds is that if you hold them till maturity, you will get back your invested sum. The interest of 2.5% from the bonds is an additional gain.Since the demand for bank lockers is much more than their supply, most bank branches tie them up with some investment product even though the RBI has asked banks to stop this practice. The first co-operative bank I approached gave us the stock reply: “There aren’t any lockers available.” But then a bank official dangled a carrot: “We are planning to increase the locker capacity and you may get at that time. First you open savings account and then give us the application for a locker. We will give lockers based on first come first serve basis.” The PSU bank I approached demanded that I open an FD of Rs 2 lakh to be considered for locker allotment. “We have few lockers and will give them only to premium customers. Either you open a new FD with us or start a savings account with higher average balance,” the official said. A new generation private sector bank was even more demanding and wanted me to purchase a Ulip with annual premium of Rs 1 lakh to get a locker. The senior official wouldn’t even entertain my request to put money in FDs or invest in mutual funds to get a locker and insisted on Ulips.You have no option but to deal with aggressive bank RMs. What makes matters worse is that if the RM is from a bank you deal with, he already has a lot of your financial details. This came out when I approached some of the banks I have had transactions with. Even a bank branch I never had a transaction with had my credit card, home loan balance details, among other things. So, the first things is you don’t reveal any specific financial information, so long as you can avoid it. Second, understand that sophistication comes with higher mis-selling. So be very specific in what you want, don’t readily agree with anything they suggest and cross check any new suggestion coming from them. Take down notes of what they tell and also take the brochures from them, so that you can cross-check the information later. Take your own time to do the product analysis. And finally, if you get tricked into buying a wrong product, approach the banking ombudsman grievance redressal.