- Role of relationship managers, financial advisors will come under greater scrutiny
- Government may consider regulating intermediaries, but this will take a long time
- It will seek to plug loopholes, put pressure on banks
- Bank systems will have fresh safeguards—till another fraudster finds out how to bypass them
Apart from hard cash, the art of managing wealth relies on two primal emotions on part of the consumer—trust and greed. In the wrong hands, of course, that’s also the perfect recipe for fraud. Looked at this way, the brouhaha around Citibank’s Shivraj Puri individuals (HNIS) to the tune of Rs 300 crore will be repeated in the future with new actors—and new suckers.
But it’s not just HNIS who hang on to every word their wealth (or relationship) manager utters. Middle-class, salaried professionals depend on their bank relationship managers just as much. For example, one Mumbai-based retired couple, Jatin and Lata Shekhar, preferred customers of a private sector bank, put their money into mutual fund schemes and corporate deposits based entirely on the say-so of their relationship manager. They’ve never checked whether he is qualified and objective. This is simply because the relationship manager represents an institution the Shekhars trust.
Given that such relationships are the norm, there’s some immediate concern about how to police relationship managers. Banking sector experts claim that typically, all banks offering wealth management services do an annual profiling of clients’ investment capability according to age, risk appetite and time horizon to invest. Investments are done in accordance with this profile—at every stage, product information and client activity flows back to the bank.
Clearly, this did not happen in the Citibank case, and if market reports are to be believed, does not happen often. “It is not possible that something this big was happening and the bank did not know,” says an established relationship manager with an MNC bank in Delhi.
“Suggestions have been made on how to create greater financial awareness and check intermediaries.”
D. Swaroop, Chairman, PFRDA
Once a bank’s relationship manager establishes an equation with a client, he is privy to the client’s financial details and acts on his behalf. On the basis of this trust, the client gives the manager a virtual carte blanche to play with his money. “The name of a bank matters, and a disproportionate amount of trust is being put on the bank by investors,” says Dhirendra Kumar, CEO of Value Research. And that is where the problem arises. Harsh Roongta, CEO of Apnapaisa, a firm dealing with insurance, loans and investments, says, “Indians have a very low sense of privacy and often give their passwords and digital signatures to their accountants and fund managers.” This, he says, may encourage managers to cross the line. Also, banks set extremely stiff targets for relationship managers to achieve; managers’ salaries are linked to their performance against those targets. Surya Bhatia, a Delhi-based financial planner, says, “The kind of pressure relationship managers have to work under is mind-boggling in terms of targets set by the banks. This forces them to go looking beyond the normal.” Roongta agrees: “Banks need to look at their incentive structure, which leads to such aggressive behavior.”
What also eggs managers on is investor greed. It thus becomes common practice for these managers go beyond their purview and customise products to suit customers’ desire for higher returns. That translates into selling financial products not authorised by the bank; playing in the stockmarkets (as was allegedly done by Puri); and even selling insurance and real estate to maximise returns. The “innovative” options include a bewildering variety of equity- or debt-linked investments in finance firms and corporates. Real estate and time-shares are other popular avenues.
Sanjay Gupta of the Hero Honda group in police custody
What makes it alarming is that these intermediaries are not regulated or monitored by any authority—it’s the banks that take on this task. And going by what happened in the Citibank case, checks and balances are either not there at all or, at best, works only in part. In the past, there have been efforts to warn customers not to issue blank cheques, check documentation and so on, but most don’t really get into the nitty-gritty. “Some banks do keep a check, but many do not act as long as their clients are happy and the bank is getting some returns,” says a leading financial planner.
“There must be a clear distinction between managers offering advice and trying to sell products.”
Ranjeet Mudholkar, FPSBI
Recognising the urgency to promote investor awareness and protection, the government had constituted an expert committee to suggest suitable measures under then pfrda chairman D. Swarup. The committee gave its recommendations more than a year ago and suggested several measures for protecting investors. Among other things, it proposed scrapping of agents’ commission in order to have a disincentive for fraudulent activities. The government is yet to act on the recommendations.
“The committee had made specific recommendations on how to achieve greater financial awareness and how to introduce stricter norms for intermediaries,” says Swaroop. “If implemented, these suggestions will go a long way in preventing and minimising financial misdeeds. Greed and gullibility of investors will also reduce with enhanced financial education.” More recently, SEBI, too, changed rules to disallow third-party cheques for investments to rein in fraudulent transfers of investor money.
Experts feel that the government needs to put some sort of regulation to control the likes of relationship managers. Says Kumar: “The government needs to fix accountability of the intermediaries. Unless that is done, nothing will change in this area.” Says Ranjeet S. Mudholkar, principal advisor, Financial Planning Standards Board of India (FPSB), “There is a dire need to establish a mechanism where financial advisors are regulated. There has to be a clear distinction between advice and selling of a product. Often that gets mixed.” FPSB has suggested an entrance test for all intermediaries in line with what regulators have for people dealing in mutual funds and insurance products.
Unfortunately, for all the noise being generated right now, market players have a sense that nothing substantial will come out of moves towards stronger policing. Somebody has to prove them wrong.