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The Reserve Bank of India (RBI) has proposed tough norms for banks involved in wealth and portfolio management services (W/PMS), mandating them to segregate sales and advisory activity, and threatened to bar them from money markets for violation of guidelines.
It plans to put a blanket ban on the practice of bank staff earning incentives for selling third-party products, since it promoted mis-selling and encourages structuring transactions to help customers evade tax, and fraudulent transfer of funds.
Cash transaction for third-party insurance and mutual fund investments will be capped at Rs 50,000 and the payment should be directly debited from the customers account and not with cheques from another bank.
"Conflict of interest arises mainly from the juxtaposition of the marketing, distribution function and the advisory or funds management function,'' says the draft guidelines on wealth management. "To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory, fund management as well as marketing, it is proposed to segregate the two functions.''
RBI's draft comes after a series of fraud charges in banks by clients and a sting operation by online portal Cobrapost.com which revealed bankers' eager to facilitate cash transactions and compromise on Know Your Customer (KYC) norms. Customers at Citigroup, HSBC and Standard Chartered have accused the bank staff of cheating them and the central bank had penalised some after a probe.
"Banks offering wealth management services are exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity about products and frauds,'' the proposal said. "As observed from the recent allegations, WMS activities as well as marketing third party products can expose banks to serious reputational risks.''
In December 2010, a Citibank employee, Shivraj Puri, was accused of luring 40 high net-worth individuals including the Munjals of Hero Motocorp to invest in a bogus investment scheme on the pretext of high returns. Staff at HSBC and Standard Chartered also faced similar charges. RBI has also emphasised on training on bank personnel before getting engaged into third-party product marketing.
It told banks to put grievance redressal machinery and compensation policy related to mis-selling, agency services and service defaults. RBI has been concerned over violation of KYC guidelines, mis-selling of products that are unsuitable for the client, conflict of interest between the marketing and advisory/financial management function, and lack of robust risk management systems and procedures leading to frauds.
Source: EconomicTimes
It plans to put a blanket ban on the practice of bank staff earning incentives for selling third-party products, since it promoted mis-selling and encourages structuring transactions to help customers evade tax, and fraudulent transfer of funds.
Cash transaction for third-party insurance and mutual fund investments will be capped at Rs 50,000 and the payment should be directly debited from the customers account and not with cheques from another bank.
"Conflict of interest arises mainly from the juxtaposition of the marketing, distribution function and the advisory or funds management function,'' says the draft guidelines on wealth management. "To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory, fund management as well as marketing, it is proposed to segregate the two functions.''
RBI's draft comes after a series of fraud charges in banks by clients and a sting operation by online portal Cobrapost.com which revealed bankers' eager to facilitate cash transactions and compromise on Know Your Customer (KYC) norms. Customers at Citigroup, HSBC and Standard Chartered have accused the bank staff of cheating them and the central bank had penalised some after a probe.
"Banks offering wealth management services are exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity about products and frauds,'' the proposal said. "As observed from the recent allegations, WMS activities as well as marketing third party products can expose banks to serious reputational risks.''
In December 2010, a Citibank employee, Shivraj Puri, was accused of luring 40 high net-worth individuals including the Munjals of Hero Motocorp to invest in a bogus investment scheme on the pretext of high returns. Staff at HSBC and Standard Chartered also faced similar charges. RBI has also emphasised on training on bank personnel before getting engaged into third-party product marketing.
It told banks to put grievance redressal machinery and compensation policy related to mis-selling, agency services and service defaults. RBI has been concerned over violation of KYC guidelines, mis-selling of products that are unsuitable for the client, conflict of interest between the marketing and advisory/financial management function, and lack of robust risk management systems and procedures leading to frauds.
Source: EconomicTimes
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