Lok Sabha Question No. 598 (UNSTARRED), answered on 2016-11-18
Subject: Transparency of Financial Products
Ministry: FINANCE
Asked by: KALIKESH NARAYAN SINGH DEO

## GOVERNMENT OF INDIA (MINISTRY OF FINANCE) (DEPARTMENT OF ECONOMIC AFFAIRS)

## LOK SABHA UNSTARRED QUESTION NO. 598 TO BE ANSWERED ON FRIDAY, NOVEMBER 18, 2016/KARTIKA 27, 1938 (SAKA)

## TRANSPARENCY OF FINANCIAL PRODUCTS

## QUESTION

## 598.  SHRI KALIKESH N. SINGH DEO:

Will the Minister of FINANCE be pleased to state:

- (a) whether the Government has mandated any regulations to increase transparency of financial products  marketed  by  banks  and  financial  institutions  to  retail  investors,  if  so,  the  details thereof and if not, the reasons therefor;
- (b) whether  the  Government  is  aware  that  banks  and  financial  institutions  market  financial products to retail customers in violation of investors best interest, if so, the details thereof and the action taken by the Government in this regard; and
- (c) whether the Government has received complaints by investors on the lack of transparency of objectives, structure of  products and commissions paid for marketing them, if so, the details thereof and the action taken by the Government thereon?

## ANSWER

## MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI ARJUN RAM MEGHWAL)

(a): Yes Madam. The Securities and Exchange Board of India (SEBI) has informed that it regulates the  activities  of  mutual  funds  through  the  SEBI  (Mutual  Funds)  Regulations,  1996  and  circulars issued thereunder wherein regulatory norms have been prescribed towards increasing transparency of Mutual  Fund  policies  marketed  by  distributors  (which  include  banks  and  financial  institutions)  to retail  investors.  For this  purpose, SEBI has mandated stringent disclosures with regard to schemerelated information, valuation policy, financial results, investor complaints, total commission paid to distributors, key executive remuneration etc.

The Reserve Bank of India (RBI) has, vide Master Directions dated 26th May, 2016 on 'Financial Services  provided  by  banks',  prescribed  guidelines  to  banks  for  undertaking  agency  business  of mutual funds, insurance  companies etc. Further,  in December, 2014, RBI formulated a Charter of Customer rights which includes Right to Suitability and the Right to Transparency, Fair and Honest Dealings, aimed at protecting the interests of bank customers in sale of third party products by banks.

The  Pension  Fund  Regulatory  and  Development  Authority  (PFRDA)  has  informed  that  after  the passage  of  the  PFRDA  Act,  2013,  14  Regulations  were  notified,  with  the  aim  of  protecting subscribers, ensuring proper management of risk and providing transparency in operations.

The  Insurance  Regulatory  and  Development  Authority  of  India  (IRDAI)  has  informed  that  it  has notified the IRDA (Linked Insurance Product) Regulations, 2013 and IRDA ( Non-Linked Insurance Product)  Regulations,  2013  stipulating  the  norms  related  to  risk  cover,  returns,  benefit  payments, product structure, charges, yield, discontinuance terms, surrender value, review of financial viability etc.,  in  respect  of  life  insurance  products.  Further,  it  has  put  in  place  a  comprehensive  regulatory framework which aims at  ensuring  transparency  of  insurance  products  marketed  by  the  insurance companies and protection of policyholders' interest.

(b)  &  (c): SEBI  has  informed  that  it  receives  complaints  from  investors  including  on  irregular practices adopted by distributors (including banks and financial institutions) which could lead to misselling and churning of their portfolio. SEBI suitably takes up the matter with the concerned Mutual Fund while complaints related to distributors are taken up with the Association of Mutual Funds in India  (AMFI),  with  whom  distributors  are  registered.  Wherever  warranted,  SEBI  takes  regulatory actions  such  as  issuing  warning  and  deficiency  letters  and  enforcement  actions  such  as  direction, adjudication, inquiry, etc.

In  addition,  to  address  the  issue  of  mis-selling,  AMFI  has  been  mandated  to  create  a  Unique Identification Number (UIN) of each employee of the distributor interacting with the investor for sale of mutual fund products. Mis-selling has been included as a 'fraudulent and unfair trade practice' in SEBI  (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities  Market) Regulations, 2003 in December 2012. Also, all mutual funds are required to 'Label' their schemes to enable investors to make informed investment decisions.

The RBI has informed that the offices of Banking Ombudsmen receive complaints on mis-selling of third party investment products by banks. Vide the Master Directions dated 26th May, 2016, RBI has formulated guidelines for curbing mis-selling such as need/ suitability assessment of products for a customer,  ban  on  cash/  non-cash  incentives  to  sale  staff,  ban  on  forcing  a  customer  to  opt  for products  of  a  specific  insurance  company  or  link  sale  of  such  products  to  any  banking  product, setting up a robust internal grievance redressal mechanism etc.

PFRDA has informed that it has not received any complaint regarding transparency of objectives, structure of products and commissions in relation to the National Pension System (NPS) or any other pension scheme regulated by PFRDA.

IRDAI has informed that in order to address customers' grievances/complaints, it has put in place an Integrated Grievance Management System (IGMS). In addition, IRDAI has also has put in place a number  of  monitoring  and  controlling  tools  to  address  and  minimise  any  type  of  regulatory violations, including periodic on-site and off-site monitoring of insurance companies, supervising the claims payment  position  of the insurance companies,  facilitating resolution of policyholder grievances,  conducting  investigations  on  complaints  received  by  the  policyholders  and  initiating regulatory action where necessary.

Further, IRDAI has informed that currently, there are no such complaints on the lack of transparency of objectives, structure of products and commissions paid for marketing them

Further, the Ministry of Finance had set up a Committee under the Chairmanship of Shri Sumit Bose to  examine  the  existing  commission/  incentive  structure  across  different  financial  products  and  to suggest measures to rationalize the same. The Committee submitted its report in August, 2015.

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