RBI move to double award may not reduce mis-selling

RBI has doubled the award that the banking ombudsman can give to Rs 20 lakh

Stories of mis-selling of financial products are aplenty. And the Reserve Bank of India (RBI) seems to be taking note of this. In its recent amendment to the Banking Ombudsman Scheme of 2006, the banking regulator has said customers who have been mis-sold third-party products such as insurance and mutual funds can be compensated up to Rs one lakh for expenses incurred, time lost and harassment suffered. The RBI has also doubled the award that the banking ombudsman can pass from Rs 10 lakh to Rs 20 lakh. 

Consumer rights activists and financial planners, however, believe that enhancing the powers of the ombudsman may not bring much relief to aggrieved customers. This pessimism basically stems from the poor track record of the banking ombudsman. 

According to the annual report of the Banking Ombudsman Scheme for 2015-16, 102,894 complaints were received by 15 offices of the banking ombudsman. Just 18 awards were issued during the year. “In very few cases are decisions passed in favour of customers. Most cases get dismissed on flimsy grounds,” says Arun Saxena, president, International Consumer Rights Protection Council (ICPRC). The banking ombudsman, he says, is usually a bank official who avoids going against banks. Customers often waste as much as a year with the banking ombudsman after which they approach the consumer courts.

Those appointed as ombudsman also at times lack the necessary knowledge and training for that office. “They have little practical knowledge of the legal and evidentiary (how evidence is gathered) process,” says M S Kamath, honorary secretary, Consumer Guidance Society of India. He cites one example. Suppose a bank customer tries to withdraw money from an ATM. The amount gets debited from his account but he does not get the money. He then files a complaint with the ombudsman. “After making the customer wait for a month, the ombudsman often takes the stance that if the bank says the money has been paid, we can't do anything in the matter. The matter gets closed after which the consumer has no option but to approach a court of law,” says Kamath. As soon as a complaint is received, he says, the bank should preserve the CCTV footage for two days prior and five days after the event, but this is often not done.

Consumer rights experts suggest the ombudsman should not be from the banking industry but should be a former judge. Saxena is of the view that the aggrieved should go directly to a consumer court where they stand a better chance of getting justice and compensation.

Financial planners say only the customer's own knowledge can protect him from mis-selling. “If a senior citizen enters a bank to open a fixed deposit and the relationship manager puts pressure on him to buy an insurance product, it is up to the former to say no,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). “Once the customer has signed on the insurance document, it will be very difficult for him to prove mis-selling.” While Rs 20 lakh may seem like a large amount, it is a pittance for banks and will hardly prove to be a deterrent, Raghaw says.

Even though the measures announced by the RBI are a step in the right direction, they may not alleviate consumers' plight, who should instead try to enhance their knowledge of financial products, or act only on a reliable person's advice, to protect themselves against mis-selling. 

Dismal performance

• 1,02,894 complaints received by 15 offices of the banking ombudsman
• 18 awards only issued by ombudsman during the year
• 31,946 complaints rejected
• 18,031 complaints settled through mutual consent
• 192 complaints withdrawn

Source: Annual report of Banking Ombudsman Scheme for 2015-16