A senior citizen is encouraged to purchase a risky market-linked product such as a unit-linked insurance plan (ULIP) instead of a safe fixed-income instrument offering steady returns. Or a homemaker purchases a mixer-grinder with EMIs, only to find she has also been signed up for an expensive credit card that never showed up but was nevertheless impossible to cancel.
These dodgy methods, which can be deceptive or misleading, are not necessarily fraudulent if the customer’s consent was obtained.
In a renewed effort to curb this menace, the Reserve Bank of India (RBI) recently issued draft amendments to its Responsible Business Conduct Regulations applicable to banks, NBFCs and other financial institutions. The amendments cover advertising, marketing and sales of financial products and services by these institutions, either by their own staff or through direct sales or marketing agents.
The proposed amendments stipulate that banks and NBFCs must have policies in place to ensure that their incentives do not encourage staff to push sales by resorting to mis-selling. They also propose that banks must have a policy to compensate customers in the event of mis-selling. RBI has thus acknowledged that incentives are one of the causes of mis-selling, but it has not actually ordered banks and NBFCs to stop dangling these carrots before their staff and agents.
Incentives are commission structures and other motivational benefits that reward staff and agents for prioritizing sales volumes for specific product types; in response, these beneficiaries often overlook RBI’s ‘suitability’ mandate.
For instance, a sales agent can earn three times the commission on a ULIP than on a term plan, or on a multiple-premium insurance product compared to a single-premium one.
The agent does not need to be dishonest to mis-sell these products, because the incentive structure is set to ‘mis-sell by default.’ As a result, other products that may be better suited to the customer’s specific needs and situations are given short shrift, as they do not hold a sizeable commission for the seller.
Elephant in the room: Volume-based payouts linked to successful sale closures are powerful motivators of performance. Such incentives cannot be done away with, given the shallow adoption of financial products by a vast majority of Indian households. Volume-based incentives, however, need to be decoupled from any incentive to mis-sell.
While the word ‘push’ is used pejoratively here, in reality, many bank managers and sales executives have built relationships with customers through hard work. This persuasive power is precious and must be nurtured.
Here is a radical thought for RBI: Can we align the ‘incentive to sell’ with an ‘incentive to do right by the customer’? The regulator can simply require banks to ensure that the sale incentive design focuses on the suitability of a product: in other words, create a system that encourages bank staff or agents to sell products that are well-suited to customer needs.
For instance, many banks have systems that give employees customized cues on which products to pitch to a customer across the table. The algorithm deployed here can be revamped to ensure that the cues are designed in such a way as to improve the financial resilience, safety and/or well-being of the customer. (Some products offer resilience, while others are meant for wealth maximization.)
Banks could develop a matrix that indicates which products are potentially suitable for a customer, ranking them by priority. This prioritization should be based on a risk analysis of product features, risk-return attributes, time horizon, complexity, fee structure etc, mapped to the customer’s age, income, level of financial literacy and risk tolerance. A full analysis would still have to be undertaken at the time of sale.
In such a system, selling a mid-priority product would hold a lower incentive than a high-priority one for the bank employee. The system could also indicate what additional details are needed to assess the suitability of more complex ‘customer profile-product’ combinations.
The idea may seem difficult to implement. And it will certainly face teething problems, perhaps by requiring a lot of documentation (with or without AI). Checks and data pulls will appear frustrating to set up and operationalize. But once in place, it will bring about a much-needed mindset shift among sales staff and agents, encouraging them to put their customer’s well-being first—not because they have suddenly been overwhelmed by a sense of altruism, but because that is where their incentive will lie.
India is at a critical juncture in financial services distribution. Health and life insurance penetration remain far below what the country’s risk profile demands. Retail participation in capital markets is growing but fragile. The trust deficit between financial institutions and the households they serve, the result of commission-driven mis-selling, is the single largest barrier to bridging these gaps.
We need radical approaches to shift this unhappy disequilibrium and must follow through with strong enforcement and monitoring to clean up the system. Breaking and rebuilding the incentive system would be a sure-footed step in this direction.
The authors are, respectively, founder, Yutadhi, a financial services think-and-action tank; and founder, Zenoa, a health insurance advisory firm.