(This story originally appeared in on Nov 3, 2012)

MUMBAI: HSBC , the word's third-largest bank, has stopped selling insurance and mutual fund products in India. Amid mounting allegations of mis-selling and certain sharp practices, the London headquarters of the British bank, which carried out a "culture audit" of the Indian retail banking and wealth management practices, has ordered a suspension of sales.

HSBC Bank is the largest distributor of mutual funds in the country. The foreign bank, which has been doing business in India for close to 150 years, reported a 30% spurt in commissions on mutual fund sales last fiscal - one of the toughest years for fund houses, life insurers and financial services brokerages.

The parent organisation has given HSBC India two months to fix the system in order to ensure that customer complaints came down, said a source. Besides mis-selling of insurance policies, these complaints related to frequent churning of mutual fund portfolios of many well-heeled investors.

Emails from ET to HSBC went unanswered till the time of going to press.

Fund distributors often earn higher commissions by advising investors to shift from one mutual fund scheme to another. Indeed, the Securities and Exchange Board of India , or Sebi , in an earlier note had pointed out rampant portfolio churning by many banks.

"Churning and mis-selling of insurance happen in other banks and brokerages as well, though the extent may differ. HSBC is possibly trying to correct its system to see that the nature of products meets customers' appetite," said a chartered accountant associated with a fund house.

In many markets, large financial services groups insist that all telephonic conversations between customers and personal bankers or wealth managers should take place on recorded lines. But this may be difficult in markets like India where bank or distributor officials use their mobiles to call clients after office hours.

'HSBC Bank a Tough Negotiator'

According to a senior fund manager, HSBC officials recently told CEOs of top fund houses that it would go slow on sales, and in some cases stop selling till further notice. Fund house sources said HSBC Bank had been a tough negotiator when it came to taking fund distribution mandates.

Several fund executives told ET that the bank often demanded higher up-front fee to drive 'exclusive sales' of equity schemes of a particular fund house. Such commissions were in addition to the upfront and annual trail fees that mutual funds pay distributors for selling their schemes. HSBC Bank's fund portfolio largely comprises lumpsum subscriptions from affluent investors. The bank, said distributors, pools a few thousand crores of investments every year.

This is the second time in five years that the Indian retail banking operations of the bank faced an internal scrutiny. In 2007-08, a team from HSBC's regional headquarters had inspected the books following suspicions that the bank was dressing up retail assets and credit card portfolios by spending more on sales agents who in turn routed a slice of the money for interest payments on loans.