Draft wealth management norms to be issued by June-end

The Reserve Bank of India (RBI) plans to introduce a new set of rules to regulate banks' wealth management operations and third-party financial product distribution functions. It also aims to strengthen know-your-customer (KYC) norms, anti-money laundering (AML) standards and rules to combat financing of terrorism.

The new guidelines would be released by the end of June.

Earlier, online magazine Cobrapost had alleged India's top three private banks were running money laundering rackets and helping individuals evade tax. "The Reserve Bank recently undertook investigations in the light of reported allegations that certain banks were involved in structuring transactions to aid tax evasion and fraudulent transfer of funds. The investigations revealed the need for better regulatory compliance by banks," the central bank said in a statement.

RBI said banks offering wealth management services were exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity on products and frauds. "It is, therefore, proposed to issue draft guidelines on wealth management services offered by banks by the end of June," the banking regulator said.

Banks are allowed to market insurance and mutual fund products as agents of other entities on a non-risk participation basis. RBI noticed in some cases, the duties of marketing personnel weren't clearly segregated from other branch functions. Also, bank employees were receiving incentives from third parties for selling their products. "Such practices may lead to mis-selling and distortion of the staff incentive structure," RBI said.

It added it would advise banks to ensure segregation of marketing functions from other branch duties. It would also ask banks to prohibit employees from receiving cash and non-cash incentives from third-party entities. Banks must also have a board-approved policy to avoid mis-selling and conflict of interest in marketing and distributing financial products.

A few bankers, however, claimed their employees weren't allowed to receive incentives from third-party entities. "In our case, and I am sure it is true in the case of most banks, employees do not get incentives directly from insurance companies and mutual funds...So, it (the new rules) will not change the way we do our business," said Shikha Sharma, managing director and chief executive of Axis Bank.

RBI said it had observed while marketing third-party products as agents, banks weren't carrying out due diligence of customers, as required under the guidelines for KYC, AML and the norms to tackle financing of terrorism. "Also, some banks are not filing cash transaction reports (CTRs) or suspicious transaction reports (STRs)," it said. RBI suggested banks must ensure proper due diligence, maintain details of third-party products and file CTRs and STRs wherever required.

RBI said it planned to replace frequently-asked questions related to KYC and AML, as well as those related to tackling terrorism-financing, on its website with a comprehensive set of questions and answers.