Under the garb of "managing her wealth" of Rs 4 crore, HSBC Bank sold her two unit-linked insurance plans (Rs 15 lakh and Rs 20 lakh) with an assurance of high guaranteed returns. Ulips used to be horrible financial products (most of them are still useless), on which she incurred large losses and the bank earned a lot of commissions.
In 2007, Ms Krishnamoorthi wanted to withdraw funds to buy a house, but she was "advised" to take a home loan of Rs 1.65 crore to get tax benefits. The bank "advised" her that the monthly instalments of home loan could be paid through investment income, which HSBC's "wealth management" division would magically generate.
In order to generate high returns, HSBC churned her portfolio. This, of course, helped it extract income for itself as commissions. She also had to pay loads of money towards mutual funds as HSBC churned them. Ms Krishnamoorthi ended up with a fat short-term capital gains tax too, because HSBC sold some investments without holding them for at least a year.
The product selection was poor. Many investments were market-linked and, therefore, volatile. Money was moved in and out of underperforming equity schemes. Very little was invested in debt funds. There was no investment income to pay for the Rs 2 lakh home loan instalment a month, even as the bank was shuffling 38 mutual fund schemes - adding to her losses and the bank's gains. When the instalments became too onerous, Ms Krishnamoorthi had to sell a piece of land and close her home loan. Overall, she seemed to have lost close to Rs 2 crore. This is a common story with clients of wealth managers or wealth advisers, under the benign gaze of all three regulators, the Securities and Exchange Board of India (Sebi), which oversees mutual funds; the Reserve Bank of India (RBI), which is supposed to regulate banking services; and the Insurance Regulatory and Development Authority (Irda). Banks have been having a good time because none of the regulators applies its mind to the current state of consumer protection rules. Ms Krishnamoorthi complained to the bank about her losses. Nothing happened. She and her former husband, filmmaker Shekhar Kapur, knew the seniormost managers in the bank. They stopped taking their calls after a while. She had filed a complaint with the banking ombudsman, but it was rejected. Moneylife wrote about her plight in 2012 and the Moneylife Foundation emailed RBI deputy governor K C Chakrabarty, the chairmen of Sebi and Irda, secretaries in the finance ministry, HSBC Chairperson Naina Lal Kidwai and others.
The Irda chairman's office acted as a post office, passing on HSBC's and Tata AIA's response that the policies were closed. All HSBC offered was to waive some of its charges and commissions and re-invest her money to make up for the losses! Based on the Moneylife Foundation's advice, and support from R Gopalakrishnan, counsellor of Disha Financial Counselling (an ICICI Bank initiative), Ms Krishnamoorthi filed a complaint with Sebi. Sebi issued a show-cause notice to HSBC about excessive churning of mutual funds and lack of due diligence. But nothing would have happened to the case without strong behind-the-scenes action by the RBI. Helped by this pressure from the banking regulator, Ms Krishnamoorthi could negotiate a large settlement of nearly Rs 1.4 crore - but could still not recover her total loss, leave alone interest or costs. It was an important lesson for "wealth managers" to learn, but let's not forget what the case really means.
One, the cause of grief for the average saver is the poor quality of products and services, mainly from insurance companies and banks, but also from mutual funds. This case deals with an individual's issue, but does not touch upon the core problem.
Two, Irda did nothing about this case. The biggest source of mis-selling is not mutual funds or banking products; it is life insurance. This will continue.
Three, Ms Krishnamoorthi was extremely lucky. She was helped by Moneylife Foundation, which relentlessly pushed her case with the RBI. A large number of aggrieved savers do not know about the Foundation, and its resources are very limited.
Four, banks enjoy the largest distribution footprint. They can sell anything to Indian financial consumers across the length and breadth of the country. However, from the consumer's viewpoint, they remain weakly supervised because the RBI regulates them through an archaic system of ombudsmen - not directly.
So, here is what we need to do to prevent consumers being taken for a ride, especially by banks. The regulators need to approve fewer and simpler products. They need to regulate financial advice by banks in all its forms. Finally, banks need to be put under the direct supervision of the RBI. Failing that, the rules that govern banking ombudsmen must be modernised, making them applicable to all "services" sold irrespective of regulatory domain - and there should also be severe penalties attached.
Neither customers nor financial services companies/intermediaries can be expected to behave responsibly. But since the latter are in a position of power and have more to gain, the onus should be on them to do what is right. When will we start thinking and acting along these lines?
The writer is the editor of www.moneylife.in editor@moneylife.in