The Reserve Bank of India (RBI) has uploaded on its website a set of draft guidelines on wealth management services (WMS) for discussions and comments. Though belated, the RBI’s efforts to frame what in effect are new regulatory rules for a fast growing but not easily defined banking activities are welcome. Wealth management services encompass a range of activities and services usually catering to the well-heeled, who nowadays have the nomenclature high net worth individuals (HNIs).
The discussion paper lists three broad activities: (a) referral services (b) investment advisory services and portfolio management services. In addition, some banks sell third-party financial products.
Under referral services, banks provide physical infrastructure to insurance companies for selling their insurance products and earn a referral fee. Investment advisory services (IAS) and portfolio management services (PMS) are regulated by the Securities and Exchange Board of India (SEBI). However, individual banks require RBI clearance to undertake these activities.
Public memory might be short, but following widespread misuse of the PMS scheme by certain banks in the early 1990s, the general permission given to them was withdrawn. All these make for a fuzzy regulatory environment. and it is not at all clear whether the new rules will provide clarity. Complicating the picture is the fact that individual banks have different business models to cater to their WMS clients.
The context in which the central bank is framing new, comprehensive rules for WMS is important. By all accounts, there has been an exponential growth in the volume of business booked under WMS, even if they are called by different names. In addition to the foreign and the new private banks, even some public sector banks (PSBs) have created structures to cater to HNIs although their sales pitch is far more likely to be muted. But what has prompted the RBI is a growing, disconcerting tendency among banks in aiding and abetting certain fraudulent acts such as tax evasion and fraudulent transfer of funds under the guise of WMS. Very recently, three top private banks were exposed by a “sting” operation by a website and, following investigation by the RBI, were fined. There are questions as to whether monetary penalties are sufficient in relation to the nature of offences, and also whether they will act as a deterrent.
The draft guidelines are comprehensive but there would be practical problems in implementing them. A major reason is that while WMS can be described by its activities, no regulatory rules can be sweeping enough to include all the activities. Moreover, some of these, notably PMS and IAS, are undertaken by several entities other than banks. There is a strong case for segregating PMS and other share market activities from main line banking activities. Past experience certainly commends such a course. Besides, there is a question of developing skill sets and attitude especially among public sector banks.
Regulatory overlap among the RBI, the SEBI and the Insurance Regulatory and Development Authority (IRDA) will have to be sorted out to minimise the scope of regulatory arbitrage. Some banks thrive on exploiting the different regulatory jurisdictions, even to the point of aiding tax evasion and money laundering.
Mis-selling of products
Mis-selling of products has become common. Banks are allowed to market mutual fund and insurance products as agents of other entities. Such a function assumes that the bank staff have the skills and expertise to guide their customers make an informed choice. Moreover, the incentive structure, for instance, rewarding individual staff directly for selling insurance policies, has encouraged sharp practices. At an even more basic level, an average bank manager will face a conflict in selling diverse finance products, many of them not banking products.
Grievance redressal mechanism
The guidelines call for a “robust” grievance redressal mechanism, and segregation of wealth management functions in separate divisions or subsidiaries. These are important suggestions, which, however, will be difficult to implement. The former assumes a high degree of coordination among several regulators and service providers. If, for instance, a bank manager sells a totally unsuitable insurance policy, who will compensate the policyholder?
In sum, there are weighty issues that the RBI will have to give further shape to in the final guidelines. The draft guidelines are, however, a step forward.