You walk into a bank to roll over a fixed deposit (FD). After you take your seat, the bank executives suggest that instead of continuing to invest in bank FDs, why not buy this insurance product, which has terrific features. The manager tells you that paying a regular premium of Rs 2 lakh a year will create a corpus of Rs 1 crore after 25 years. You fall for it. You walk out with a product that will mean less than five per cent annual return over 25 years. This is a far worse return than on the deposit your bank manager dissuaded you from rolling over in his own bank. Other bank depositors have met fates far worse than this.
Why would the banker persuade you to buy an insurance product and take money out of the bank? Unknown to you, the bank is acting as a sales agent for the insurance company. The bank will make more commissions than the interest income out of your deposit. Plus expenses couched as marketing support, use of banking infrastructure, etc.
This has been going on for over a decade. The only action by the insurance regulator so far has been to reduce the loot that agents like your banker can make off you.
About two weeks ago, the Reserve Bank of India (RBI) announced fresh guidelines for banks selling insurance, called "bancassurance". Banks have been acting as agents, which means they have minimal responsibility towards you - their own customers of banking services. The new guidelines now give banks the option to become brokers. Insurance brokers have to necessarily take the side of the customer, not the insurance company.
But banks want to exploit their branch network to claw out commissions and expenses from their principal, the insurer. As brokers, they cannot do so because it is illegal for brokers to sell the insurance products of one company on an exclusive basis like an agent can. Also, they don't want the fiduciary responsibility and liability attached to broking. Will banks become insurance brokers, encouraged by the new guidelines? The answer is obvious, but I am hoping at least one bank will prove me wrong by opting to become an insurance broker and shift to the side of their customers.
To summarise the model: banks have millions of customers that insurers want to reach. So they tie up with an insurance company that is part of the same group (HDFC Bank-HDFC Life) and persuade customers to buy only those products offered by their partner insurance company. This immediately restricts choices. The goal is to earn commissions and benefits that go straight to the bottom line without any liability or responsibility. Also, some of the worst product choices for customers fetch the highest commissions for banks and vice versa.
Consider this comment from an insider. Deepak Satwalekar was running HDFC Life and was a member of an Insurance Regulatory and Development Authority of India (IRDAI) committee on bancassurance in 2011. He wrote: "The banks with their ready-made superior distribution network have held the insurance companies to ransom. They have played one insurer against the other in order to 'extract' the highest compensation they can get. One hears stories of compensation, either in commissions or as reimbursements in one form or the other, being paid which are higher than that permitted by IRDA. Hence, permitting banks to appoint two insurers, albeit in different geographies, would be like legalising their extortion." And Mr Satwalekar is only talking about the insurer's pains; think about what happens to the buyers.
In short, the bancassurance model is horribly anti-consumer; the regulators have created, supported and tinkered with it for the past 15 years. The RBI "guidelines" on bancassurance do ask banks to have a system of "assessment of the suitability of products for customers". They also ask banks to "treat their customers fairly, honestly and transparently … not to link sale of such products to any banking product" and set up a "robust internal grievance redressal mechanism". The question, as usual, is what happens if banks don't follow them? "Violation of the above instructions will be viewed seriously and will invite deterrent penal action against the banks," says the RBI.
Don't bet on it, given the pathetic record of the IRDAI and the RBI in ensuring that customers are fairly treated. The RBI has never initiated "deterrent penal action" on banks for treating consumers badly. Even after the scandalous Cobrapost expose, banks were let off lightly. There is nothing new in the guidelines to make the banks sit up and change their current predatory tactics of selling insurance. This will become obvious fairly soon, when it is clear that banks don't want to become brokers.
What could the RBI have done? As a principle, put the "conduct" of the financial services companies and the well-being of the customers at the centre of the regulatory system. This is now the guiding principle in most advanced nations. But since the Indian regulators will not do it, the time has come for the financial services division of the ministry of finance to step in and cull out the grievance-handling departments of different regulators and create a single entity to monitor the conduct of all financial service companies and make them accountable to customers. This idea was recommended by the Financial Sector Legislative Reforms Commission (FSLRC) that labelled it the Financial Redressal Agency. The RBI governor has twice sneered at the FSLRC's ideas - but the RBI's weak bancassurance guidelines and irrelevant consumer charter issued last year convinces us that we need the redressal agency as soon as possible.
The writer is the editor of www.moneylife.in