The Mis-Selling Menace

Executive Summary

The report examines the likelihood of mis-selling financial products, particularly life insurance policies, by banks in India. The banking regulator and the governments, over the years, have done a commendable job in establishing the trust of the public by saving banks even when they have failed. Because of this, people perceive banks as trustworthy. On top of this, banks have an edge in terms of intelligence w.r.t. how much money do their customers have, where do they invest, etc. The bank relationship managers (Bank RMs) call customers to sell life insurance products, disguising it as an excellent investment option. The instances of mis-selling by Bank RMs are very common to hear. It examines the mechanisms, motivations and consequences of such practices while assessing regulatory frameworks and suggesting potential reforms.

Key Findings

1. Rise in Insurance Commissions:

   ○ Insurance agents, especially those affiliated with banks, earn significantly higher commissions than mutual fund distributors, with first-year insurance commissions ranging from 2x to 11.3x those of mutual funds.
   ○ In FY24, the top 15 banks earned ₹21,773 crores in commissions from selling insurance, mutual funds and other financial products, with up to 25.2% of their total income derived from commission, exchange and brokerage fees.

2. Mis-selling Practices:

   ○ Mis-selling tactics include bundling insurance policies with loans, exaggerating returns on ULIPs and pressuring customers to purchase policies while availing banking services.

3. Impact on Customers:
   ○ 49% of life insurance policies were discontinued by the 61st month, indicating that customers were either misled about product benefits or were unable to maintain premium payments.
   ○ Banks are incentivised to promote their group companies' products, with up to 100% of their life insurance commissions and 99.1% of mutual fund commissions coming from related-party entities.

The report underscores the urgent need for regulatory reforms to curb the mis-selling of insurance products in India, especially through banks. The data highlights that there’s an ardent need for enhanced norms ensuring transparency and the adoption of a fiduciary standard for financial intermediaries to safeguard consumer interests and restore trust in the financial ecosystem.