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Buying Financial Products? Beware!

By Sanjay Kumar Singh & Karthik Jerome
Last updated on: November 27, 2023 19:58 IST
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Avoid relying on a bank RM for investment advice.
Instead, approach a Sebi-registered investment advisor whose livelihood depends on the fee paid by his customers and not on product commissions.

IMAGE: Kindly note the image has been posted only for representational purposes.
People wait in a queue at a bank in New Delhi. Photograph: Sanjay Sharma/ANI Photo

The Insurance Regulatory and Development Authority of India (Irdai) has formed a task force to look into various aspects of the bancassurance channel, including mis-selling.

Until Irdai comes out with concrete measures to curb mis-selling, the onus remains on customers to avoid falling prey to this menace.

Common forms of mis-selling

A common type of mis-selling happens when a person enters a bank branch for a fixed deposit (FD) or a Public Provident Fund (PPF).

Instead, the relationship manager (RM) convinces him to go for an insurance-cum-investment plan, such as a unit linked insurance plan (Ulip) or a traditional plan.

"The trust customers place in their bank is at times misused," says Sumit Kumar, a New Delhi-based consumer lawyer.

According to Deepesh Raghaw, a Sebi-registered investment advisor (RIA), "When a person invests in an insurance-cum-investment plan, especially one s/he does not need, s/he ends up paying a mortality charge (cost of insurance), which reduces her/his returns".

The impact is especially high for senior citizens who have to pay a higher mortality charge.

Sometimes, investors are told they are being sold a single-premium plan, but in reality it is a multi-premium plan. If the premium runs into several lakh, investors find it difficult to pay subsequent years’ premiums.

If they abandon the policy prematurely, they incur a loss in traditional plans.

Customers are often promised high returns.

"Returns in insurance-cum-investment products rarely exceed 3 to 6 per cent," says Shilpa Arora, co-founder, Insurance Samadhan.

Misaligned incentives

The primary reason behind mis-selling is wrong incentives.

"Incentives and commissions and are the chief causes," says M Pattabiraman, associate professor, IIT-Madras, and founder,

Burdened with steep targets, the sales force becomes willing to overlook customers' interests.

The commission structure is another driver. "The commissions can be as high as 30 to 50 per cent in the initial years," says Arora.

The commissions, moreover, are front-loaded. "The seller earns a very high commission in the first year itself. Even if the product is discontinued, he is not bothered because he has made his money," says Raghaw.

Insurance products are complicated and come with lengthy documents that are difficult to read and understand.

"Insurance products are opaque. It can take weeks of research to understand one product," says Avinash Luthria, RIA and founder, Fiduciaries. Forced to rely on the seller's word, buyers get hoodwinked.

Do your research

Avoid relying on a bank RM for investment advice. Instead, approach a Sebi-registered investment advisor whose livelihood depends on the fee paid by his customers and not on product commissions.

The onus also lies on customers to make well-informed choices. "A product is mis-sold only because it is mis-bought without adequate research," says Pattabiraman.

Spend time reading the product brochure and reviews published by reliable sources.

"Understand the nature of the product, the premium-payment term, etc. Ask for written communication from the bank RM. This can serve as proof if mis-selling happens," says Arora.

Customers should also read the insurance contract before signing on the dotted line.

"Read the terms of the contract and check what the seller has declared in the proposal form on your behalf. Both the ombudsman and the consumer courts decide on the basis of terms of the contract and the declarations," says Kumar.

If you are buying a non-participating plan, find out its net yield from a reliable source.

Before the policy is issued, customers get a call from the insurer.

"The caller explains the product's key features. If there is a dispute between what the bank RM has told you and what the caller says, go with what the latter says," says Arora.

Avoid unnecessary visits to the bank branch. "Senior citizens make regular trips to update their passbooks, which is when they fall prey," says Pattabiraman.

Post-purchase checks

On receiving the policy document, go through it. If the policy is not what you thought it to be, return it within the free look period, which is of 15 to 30 days.

If this period has passed, create a lot of noise on social media.

"The reputational risk this creates for the bank and the insurer at times forces them to return your premiums," says Raghaw.

On realising they have been mis-sold, most customers choose to wait for the earliest opportunity to surrender (post five-year lock-in for a Ulip and two-three years in a traditional plan).

"The loss on surrendering and exiting is usually less than on paying the premiums for an unsuitable product, but most people refuse to see it that way," says Pattabiraman.

Procedure for redress

First, write to the insurer's grievance cell. They are obliged to respond within 14 days.

"If you are not satisfied with their reply, write to Bima Bharosa, Irdai's complaint portal. They are also supposed to respond within 14 days.

"If you are not happy with their reply, approach the insurance ombudsman. If you are not satisfied with its decision, approach a consumer court," says Arora.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/

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Sanjay Kumar Singh & Karthik Jerome
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