Mis-selling, in simple terms, is the selling of a financial product by a financial intermediary which is not suitable to its client. Recently, the Finance Ministry issued a report proposing measures for curbing mis-selling and rationalising distribution incentives in financial products. The primary objectives of the report are to bring some amount of uniformity in relation to the distribution of financial products in India and to improve the quality of the disclosures made to investors. The recommendations are broadly divided into two parts. The former outlines the broad principles that should be applicable to any retail financial product and the latter provides product specific recommendations.
The report recommends that all retail products ought to be structured with costs and benefits easily discernible for investors; which is a laudable suggestion. However, the proposal for homogenous cost structures for all product classes and cost caps for bundled products may be detrimental to innovation and growth within the market. The report proposes that product disclosures should be such that they can be easily understood by a retail investor. In addition, the report suggests the gradual phasing out of the up-front commission system for distribution of mutual fund products.
The report observes the lack of a regulatory framework for the financial product distribution business. At present, piece-meal efforts are underway, specifically in relation to the regulation of mutual fund product distribution through a self-regulatory mechanism. However, it appears that the report suggests a holistic regulation of the financial distribution business, as opposed to an isolated product/ sector specific regulation. Although self-regulation may be an effective regulatory solution for the distribution industry, there may be a need for an all- encompassing self-regulatory body across all sectors covering all retail financial products.
In the background of the recent SAT decision quashing the in-principle approval granted to IMFI (promoted by AMFI) to act as an SRO for mutual fund distributors, it would be interesting to see whether the regulators would take into account the recommendations of the Finance Ministry report and opt for an SRO for distribution of all financial products or stick to its original stand of having an SRO only for mutual fund distributors.