Retail Banking

1. Recent money laundering allegations an opportunity for Banks to fix miss selling
Back Ground:-
Recent allegations on money laundering by leading banks in India, should in fact, be used as an opportunity to plug in the issue of miss
selling under the guise of Investment Advisory Services, by bringing a change in the existing product delivery system under Investment
Advisory Services to a more potent Financial Planning Services controlled directly by central offices.
Post 1994, Banking customers in India has been demanding more and more opportunities to invest their surplus cash in one product or the
other with an objective to earn better returns than the traditional fixed deposits.
Problem:-
Banks have been meeting this demand by selling Insurance Plans, Gold etc in bulk numbers to customers promising high returns, which
often is blamed or alleged as miss selling by aggrieved customers, when promised returns doesn’t materialize.
Rising number of complaints with Banking & Insurance Ombudsman against miss selling has been a worrying factor over these years.
But now situation has taken a new turn to even more serious allegation of money laundering, which is a major Reputation risk for any bank.
Hence it is important to analyze the reasons for such miss selling happening from Bank branches, as Banks like HDFC, ICICI and Axis
probably has the best Audit teams and Best process inbuilt to deliver Retail Banking business, across the world.
Otherwise they would not have grown to such big entities, in such short span of time, and their managements are known for aggression along
with high ethical and moral standards.
Hence problem is often identified with individuals, who often make mistakes of miss selling or hiding facts and figures while selling financial
products or even regular banking products, like not discussing about charges and other requirements, which often comes as a surprise to
customers, when they read their statements. This is dangerous considering the level of competition and subjects Banks to reputation risk.
Roots of Problem:-
Let’s understand Investment Advisory Services and how it is delivered from Branches.
Banks in India has been offering Investment products under Investment Advisory Products or Third Party Products.

2. Major products sold has been Insurance (Both Life & General), Mutual Funds and Gold Coins etc to even structured products.
Out of these, it is the Gold Coins and Insurance plans, which enables Banks to earn maximum revenue by way of commission or margins and
employees excelling in sale of these products, enjoys a special place in their respective teams and they normally are considered to be the best
performers.
But many a time , gilt and glamour of being the best often turns people in to try out, ways and means to circumvent the rules and regulations
by one way or the other, to achieve or super achieve their targets, resulting in exploiting the loop holes in the rules and regulations and
bending it for accommodating illegal transactions.
Banks on their part has a limitation to check these independent acts of employees, who doesn’t do anything violating the rules and
regulations on the face of it, as it will be caught by Audit and existing checks but by exploiting loop holes, which may be due to immaturity
and ignorance but ultimately damaging the Banks hard earned reputation.
Solution:-
Hence the problem lies in the Delivery Model, as responsibilities of selling lies with a set of Relationship Managers or Personal Bankers or
similar profiles and Bank management’s role ends up at training, monitoring and checking on whether rules and regulations are followed or
not by way of Audit. Mandating certification from AMFI/IRDA etc to ensure the quality of advice doesn’t change much on the ground.
Thus ultimately sales happen on the wisdom of these young Relationship Managers or similar profiles, who often gives more wieghtage to the
result than quality of advice , exposing Banks to serious reputation risk.
Strategy:-
Changing Investment Advisory Services with Financial Planning Services.
This is where, Banks needs to change the process of delivering sales of investment products by introducing a transparent system of sales,
which will highlight an agreement on Risk Appetite, Financial Goals of Investor along with conformity of advice rendered by the officer at the
branch and research team at the Central Office.
Let’s discuss in detail:-
In order to implement the Financial Planning Module system, Bank needs to have a full fledged Research Team and Needs to develop a
Financial Plan module, available as part of CRM, along with present set of RM/RO /PB structure.
Most of the banks have both research & RM/RO/PB set ups, but yet to have any solid Financial Planning Module based on algorithm method
used by Fund managers, where decisions are made automatically based on inputs.
Research Team Scope:-
Research on investment products and factors determining their performance should be done by them, involving economists, Expert financial
planners and other experts.
Research team should be managing the Financial Planner Module and they should be updating the module with their views and suggestions
continuously.
Every suggestion should be based on Customers Risk Appetite, Financial Goals/Objectives and Present Financial status.
Every suggestion should spell out expected returns, time frame required and down side risks and over a period of time, Research team should
be able to highlight the success ratio of their advices.
Financial Plan Module Scope:-

3. Banks will have to make some investments to develop a user friendly Financial Planner Module, which should be accessible by Branch
RM/RO/PB etc within Branch Premises as well as outside.
FP Module should capture Customers financial horoscope and should be able to get an agreement on Risk appetite (High, Medium, Low) and
Financial Objectives (Why investments, goals etc).
Agreement by customer is a critical aspect.
Post agreement, it is about various products which can fit in to customers risk & goal profile, which should be an algorithm process, where
module should automatically give options.
Every option should highlight the benefits, risks.
Officer’s job is in hand holding the customer through the FP module advice, which in turn is updated by the Research team at central office,
who has all the information’s and techniques for rendering the best advice on behalf of Bank.
Every sale should be effected post execution of an advisory agreement document by officer of the bank and customer.
Here again , banks can have further checks at Branch Head level for amounts exceeding Rs.10 lacs or whatever amount and higher checks for
higher amounts at various levels. This will insure bank from future miss selling complaints.
And similarly, miss selling window will get closed permanently with automated Financial Planner delivery model.
Objective of the process should be, Advice coming from a well equipped research team , delivered post analyzing the customers risk and goal
profiles, based on prudent guidelines of financial planning.
Benefits:-
For customers and banks , this process will be a win –win situation , as for banks they will not only be protecting their reputation risk but
better the quality of advice will mean better customer response.
Better advice can be an effective tool to differentiate and promote banks advisory services capability to lure more customers from competition
and same time financial planning module will help banks to capture more and more details of customers for their future business
opportunities.
When a process like FP module is introduced to the customer , often customers get excited and tries to get best options by providing
maximum information’s, and for banks it’s a great opportunity. Any Relationship Manager will vouch for the fact that, more time with
customer means more products.
For customers, it will be a great convenience as banks will be their new financial advisors and they will be more than happy to move away
from individual wisdoms on investments to bank up on a Banks well researched advice.
Thus Banks should move to Financial Planner/ automated Financial Planning mode from present Relationship Manager/Personal Banker
advisory delivery mode, where Relationship Manager /personal Banker’s job should be to hand hold the customers through the automated
advice generated by Central Research team, than selling products and service using their wisdom, which as discussed, often influenced by job
targets and rewards than the prudent rules and guidelines of financial planning.
As we say, everything that happen is for the betterment, Believe the present allegations too will create something better for our otherwise tall
names in Banking.