Mis-selling & mis-buying of schemes

In both cases, it is the customer who suffers financial loss
Mis-selling & mis-buying of schemes
"With banks acting as corporate agents, there has been a manifold increase in the business of insurance companies." [Representational Image] Advantus Media Inc. and QuoteInspector.com [rockbridgeinvest] Creative Commons

Banks have fast transformed themselves into ‘One-Stop Shop’, offering you not only personal banking services and products, but also investment advice, investment vehicles and third party products such as insurance policies.

This means you don’t have to wander from institution to institution to shop each area of your financial need. Shopping all the required financial products and services under one roof is of course a delight as it saves you a lot of time and effort.

Banks acting as ‘One-Stop Shop’ is not something new as they have been offering financial products of varied nature beyond their traditional banking products and services through decades.

However, the unprecedented digital push, especially during the ongoing Covid-19 pandemic, to the financial system has loaded these ‘One-stop shops’ with huge rush as millions of new customers have boarded the digital platform.

They now prefer to conduct all financial transactions beyond banking needs at a single point.

In other words, the bank branches have been perfectly converted into super financial markets where a customer of any nature gets all financial services under one roof. In this ‘One-Stop Shop’ boom, it’s the insurance sector which has got a fillip as banks have been more active to sell insurance policies, life as well as non-life, to its customers at large scale.

With banks acting as corporate agents, there has been a manifold increase in the business of insurance companies. At the same time, it has also been proving advantageous for the banks to scale up their revenue through commission/fee-based income.

As per the data available, India’s insurance penetration was pegged at 4.2% in FY21, with life insurance penetration at 3.2% and non-life insurance penetration at 1.0%. In the first half of FY22, the life insurance industry recorded a growth rate of 5.8% compared with 0.8% in the same period last year.

In July 2021, non-life insurers’ premium, which include general, standalone and specialised public-sector, recorded 19.46% YoY growth and reached Rs. 20,171.15 crore (US$ 2.71 billion) against Rs. 16,885 crore (US$ 2.27 billion) in the same month last year.

Notably, in March 2021, health insurance companies in the non-life insurance sector increased by 41%, driven by rising demand for health insurance products amid COVID-19 surge.

Market experts are optimistic about the promising future for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers.

Life insurance industry in the country is expected to increase by 14-15% annually for the next three to five years. Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of Indian life insurance.

However, amid this insurance boom, all is not well with the bank customers. If customers’ feedback is taken into account, mis-selling of insurance policies is rampant.

Even mis-buying of financial products is equally proving a cause of inconvenience to the customers. A lot of stories galore which narrate tales of mis-selling of financial products, especially insurance policies, to gullible customers by officials of banks at the counter. Those who cannot afford to pay the premium of the insurance, are forced to take the insurance cover.

There are many such instances when banks have forcibly made the borrowers obtain insurance cover and most of the time the insurance premium is deducted from their loan accounts. Even as customers show resentment against this practice, the staff at the counter hardly desists from such practices.

In other words, the disbursement of loans has been made hostage to insurance products, where some banks have been forcing customers to buy specific insurance policies.

Some banks even have made it “mandatory” for the borrowers to buy an insurance cover before loan is disbursed. Precisely, what we find are instances of arm twisting borrowers to take specific insurance policies. Some of these are more expensive and serve little purpose.

What is mis-selling of financial products?

Mis-selling of financial products is simply completing the sale of a financial product or service in the most deceitful manner. In this kind of selling, the products or services sold to an individual or even to a company do not suit their needs. For instance, a life insurance policy is sold to a bank customer who has no dependents.

Here, the insurance serves no purpose to the customer and only profits the insurer and the bank. In mis-selling, the financial product is materially misrepresented as something that it is not.

The customer is intentionally misled as the officials either give incomplete details regarding a sale or provide a set of false information. There is another way of mis-selling the financial product. An unsuitable financial product or service is sold to a customer.

What is mis-buying of financial products?

Mis-buying of a financial product happens when you take the route of a financial scheme or service which does not suit your needs. It usually happens when you invest in a scheme or buy any other financial product or a service without understanding its features and suitability to you. You invest because someone has recommended it to you.

In other words, we usually find that savers make dozens of mistakes while investing in a financial scheme - partly because they are careless and partly because we humans find it hard to deal rationally with money. Commonly, they buy a scheme without understanding its features, or risks associated with the investment.

An element of greed or too trusting nature also results in mis-buying of a product. Unfortunately, mis-buying is not accepted by an investor and very easily tends to pass the buck on to financial intermediaries who sell financial schemes.

Actually, nobody expects bad things to happen. But in financial matters, this optimism is counterproductive. Investors buy on the expectation of better returns, but without taking into consideration the negatives.

People find it useful by moving in herds for survival, but this herd mentality has disastrous consequences in financial matters.

How to avoid mis-buying financial products?

The basic prescription to prevent mis-buying is literacy. When you intend to buy a financial product, it’s necessary for you to do your homework before buying the product.

If you are not able to understand the features of the product, don’t hesitate to consult a financial expert or the staff at the operational front in a bank to understand the product.

Here, the financial institutions who sell these products are under obligation to spend some time on educating the customers.

They should not feel shy to disclose probable negatives of the financial products, especially insurance schemes.

In succinct, you should not buy a product unless you have understood it fully. Don’t fall prey to the greed of handsome returns.

Is it mandatory for a borrower to take a life insurance policy offered by the bank?

Banks cannot force borrowers to buy a life insurance policy or any other non-life policy while granting a loan facility. It’s illegal.

The Reserve Bank of India (RBI) “best practice” guidelines don’t contain any mandatory directive to offer insurance with loans. In fact, banks have been advised by the regulator not to force their customers to purchase an insurance product.

Even the directives are clear that the banks cannot adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank.

The directive reads that customers should be allowed to exercise their own choice. There should be no ‘linkage’, direct or indirect, between the provision of banking services offered by the bank to its customers and use of insurance products.

Under all circumstances, the bank has to seek your consent to bring you under the umbrella of insurance. In this regard, it’s your will that has to prevail. One can lodge a complaint to the high-ups of the bank and even to the Banking Ombudsman.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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