Wealth management services (WMS) undertaken by banks have gained substantial prominence in the reform era. With bank managements forced to look for additional avenues to boost profitability, catering to the rich through special products and niche services became common practice even among public sector banks. At the same time, disintermediation has been gaining hold in the financial sector, giving traditional bank customers ample choice in parking their savings in a variety of non-banking products such as mutual funds. As stock markets boomed, it was a question of time before well-heeled bank customers — now referred to inelegantly as high net worth individuals (HNIs) — forced banks to offer market-related products. Public sector banks faced a stark choice: either allow HNI accounts to migrate to private Indian or foreign banks or offer these services, even if at the risk of breaching rules and regulations.
The regulation of WMS has been sparse and vests with different agencies like the RBI, SEBI and the Insurance Regulatory and Development Authority. The need to bring decades-old regulatory rules up to date has been felt not just because of the tremendous growth in the volume and range of businesses that go under the broad category of WMS but also because as many as 25 banks, three prominent private banks earlier and very recently 22 banks, both public and private, were found guilty of stretching even these minimal rules and slapped with stiff fines. Their complicity in aiding and abetting tax evasion and possibly money laundering, all in the name of providing value-added services to clients, is a matter of serious concern. More so because the sting operation by the website, Cobrapost, also showed them having scant regard for well-established account opening procedures such as know-your-customer rules. Reframing guidelines is an important step, but it will be more productive if individual banks put in place an enforceable control mechanism to weed out abuses. The RBI is prescribing new guidelines for three services under WMS — referral, investment advisory and portfolio management services. It is certain that not all the activities that banks undertake under WMS can be covered by guidelines, however well drafted. Besides, activities such as portfolio management services are undertaken by a number of others, especially stock brokers. Traditionally, banks have kept away from stock market activities and for very good reasons too. It is perhaps time to try a new approach by conferring special licences to entities including banks to undertake key WMS activities in separate structures. Banks can then pursue their traditional activities of deposit taking and lending without fear of being driven by unhealthy competition.