HSBC Bank suspends selling of Mutual funds and Insurance in India. Hope all banks follow suit!

Kripananda Chidambaram, 03 Nov 2012

I read a report today in economic times that HSBC has suspended MF and Insurance sales in India amid allegations of mis-selling and certain sharp practices.

One factor was a surprise and the other was not.

What did not surprise me were the allegations of mis-selling of products 

A bank makes profit is many ways. Core activity of a bank is borrowing and lending of money, and that is where they make larger chunk of profits. Bank also makes good money by distributing various financial products like insurance and mutual funds. These are called as third party distribution.

Like any other profit making entity, banks also wishes to make handsome profits. One of the focus for banks is to make good money in third party distribution and how can do this?

Probably  by 3 things:

1. Sell more and more products to the customer

Is this mis-selling? 

We at Fintotal firmly believe that approach to personal finance should be as simple as possible. For a successful financial life one needs to probably have one term insurance, one family floater mediclaim, 2-3 mutual fund schemes and around 10 stocks. Anything more than this is too many for a retail investor.

2. Sell more and more products to as many customers possible

Is this mis-selling?

Not really as long as appropriate products are sold.

3. Sell products that give them more commissions

Is this mis-selling?

Financial products be it insurance or mutual funds have various costs inbuilt in them. One set of costs are sales and distribution expenses. When the sales and distribution costs are high, naturally overall cost of the product goes up for the investor. This finally lowers the returns.  But if bank wants to make more money, they will be inclined to sell products that give them higher commissions. That is exactly why they are more interested to sell investment linked insurance policies etc. 

and what surprised me was that HSBC deciding to suspend selling of products.

Though we are not averse to banks selling products, we have a problem in the way they sell them. The conflict of interest will always remain; seller and buyer are not in a win-win situation.

Banks should move from the 'sell' approach to 'advice' approach. It will be fair if they charge fee for client centric advice and not treat financial products like FMCG products- Sell, sell & sell.


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