Debashis Basu: One inch at a time

If the RBI really wants banks to treat customers fairly, it should do a lot of groundwork in collaboration with customers and consumer organisations

The Reserve Bank of India (RBI), which has watched with serene detachment the large-scale mis-selling of life insurance and portfolio churning of mutual funds by banks, despite having a "customer services department", has now woken up to an idea borrowed from the West: treating customers fairly. Tucked away in a corner of its latest tome on "Trends and Progress on Banking", the RBI says, "Treating Customers Fairly (TCF) is a consumer protection policy designed to address the problem of asymmetric information in the financial services industry where financial service providers possess certain information that the consumers do not. It is a regulatory initiative by which firms are required to consider their treatment of customers at all stages of the product life-cycle, including the design, marketing, advice, point-of-sale and after-sale stages. By encouraging firms to re-evaluate their company culture and to inculcate the attitude of treating customers fairly, the outcome is likely to result in a more optimal one from the perspective of regulators, consumers and ultimately, firms."

Does this mean that banking customers from now on will be sold financial products designed with customers' interests in mind? Marketed without false advertising? Backed by "advice" that is genuine and honest? Carrying "after-sales" support?

Don't bet on it. This is simply because, as a "regulator", the RBI does not want to dirty its hands with the details of customer protection issues, especially regarding third-party products. Even for banking services, it does not have a direct grievance redress system. Bank customers are supposed to get their problems solved by the banks that create them. 

The RBI has issued a master circular that covers, in minute detail, routine banking operations such as the opening and operation of accounts, statement of accounts, pass books, issue of cheque books, complaints/suggestions box, complaint book/register complaint form, etc. In this maze of rules governing routine banking operations, the system of customer redress is lost. That same circular prescribes a system that comprises handling grievances. It asks banks to set up customer service committees of the board, a standing committee on customer service, branch-level customer service committees, nodal department/official for customer service and board-approved policies on customer service. 

Is this structure of delivering redress through layers of internal committees working? Nobody knows. The RBI's job has ended with issuing a circular, which, as I mentioned some months ago, is a 95-page clerical masterpiece that even includes "Format for Comprehensive Notice Board" at the branches. The RBI has no system of checking whether its circular is being flouted.

If customers are not satisfied with the way banks treat their complaints, they can go to Banking Ombudsman. The ombudsman scheme is outdated. While the RBI more than a decade ago allowed banks to sell third-party products, it has not bothered to update the ombudsman scheme. The ombudsman deals only with banking operations such as interest calculations. It does not care about mis-selling of insurance, for instance.

On top on this rickety and flawed mechanism of addressing customer complaints, the RBI has added the TCF idea. If the RBI had asked banks to follow a TCF code about banking services, that would have still made sense. To ask banks to treat their customers fairly about third-party products would seem overambitious. After all, the RBI has so far only paid lip service to formulating enforceable rules on the mis-selling of such products by banks. 

The fact is that neither the RBI nor banks have any control over design, marketing, advertising and after-sales of third-party products. How can bankers treat customers fairly when, as per a tie-up with an insurance company, they are supposed to sell a life insurance product that will give, say, a five per cent return and offer minimal insurance cover? They will hardly apply their minds to the question of whether this is in the interest of their customers - unless, of course, the RBI first creates elaborate rules (the spirit of which should be "caveat venditor") and then penalises a few banks that are found to be flouting them. The RBI is far from doing this. It seems utopian to first allow banks to blindly sell anything they can - often turning tellers into hustling salesmen - and then to suddenly ask them to treat customers fairly. 

The RBI has so far not come up with rules that govern sales of third-party products, an important source of problems for bank customers. In June this year, in its seventh Financial Stability Report, it came up with some motherhood statements on mis-selling such as "it is important to enhance the credibility of the financial system by addressing the risks posed by mis-selling of financial products, perverse incentive practices…." While the report at least acknowledges the problem, the solution, which is laced with a bunch of homilies, is straight out of the 1980s - more disclosure - which has widely proved to be useless in curbing mis-selling or mis-buying. 

If the RBI really wants banks to treat customers fairly, it has to stop sermonising and do a lot of groundwork in collaboration with customers and consumer organisations, something it hasn't done so far.

The writer is the editor of www.moneylife.in
editor@moneylife.in