Misselling of Investment products - crime against humanity

Misselling of investment products has reached menacing level. I am illustrating my point through some paper clippings alone. Many people has lost their life savings due to misselling.
Our own Suchitra Sen has been vicitim of misselling. Even CMD of a Central PSU has lost lot of money , in-spite of his access to superior information.

I have been a victim of mis-selling myself says Hoshang Noshirwan Sinor, newly appointed chief executive officer of Association of Mutual Funds of India (Amfi)



Mis-selling is rampant despite Amfi laying down a code of conduct for funds and distributors. Is there a way out?

I have been a victim of mis-selling myself so I would know. When I took over Amfi, the first thought that came to my mind is how do we stop somebody from mis-selling or misguiding gullible investors. More and more fund houses are launching complex products that frankly even many agents would not understand properly. Not only do some of them mis-sell, they also misguide. Something needs to be done. I have no ready answer at this stage, but this is on top of my agenda.

(source : Posted: Sun, Mar 7 2010. 10:45 , Money Matters LIVEMINT.COM)

This is what has happened to the head of most important financial institution.

Few paper cuttings will illustrate my contention clearly :

See how a former banker quit banking, since his main job has been relegated to selling (misselling) insurance and destroying wealth for investors. 

Watershed article in Money Today Magazine. See how nicely people are cheated!

    What to do, if you have bought wrong policies ?

  Are Endowment & Moneyback ( both are sold either as ULIP or Traditonal or Opaque policy) policies good for you ?

Money back policy is the worst policy one can buy and it is only product which the agents sale in a missionary zeal. Almost eveRy investors ends up buying Table 14 or 18 of LIC Charts for various policies.

Can an agent say " one particular policy is giving 11% return " ?

No, completely illegal - read ....what CS Rao the head of apex body of Insurance (IRDA - which is RBI of Insurance Companies)

Buying Mutual Fund during NFO is good ? 
Read....

                  What is the actual meaning of 9% p.a. flat rate of  loan ?

Many people buy stocks directly. It is better to invest through Mutual fund with the help of expert fund manager. Very people (less than 2%) people can outperform an expert fund manager. 

Daniel Kahneman won nobel prize on Behavioural Economics in 2002, although he is a psychologists. He shows how people take irrational decision due to loss aversion etc. How people talk about winning bets and do not talk about loss. How costly is that in a long time. 

Listen to it form the master.

http://video.cnbc.com/gallery/?video=3000053951

Mis-selling saga: Will wronged policyholders get justice?

As policyholders we are also responsible also for falling into such traps

Deepti Bhaskaran  Mint Feb 06 2013. for full article read

Six years ago, I became a life insurance agent. As a journalist writing a story on the quality of agents’ training and licensing, this was the only way to get a first person account (I was working in another newspaper at that time). An agent from a private life insurance company, who came to sell me a unit-linked insurance policy (Ulip), assuring double-digit returns, helped me since he was a couple of new recruits away to a holiday in the hills.

His aspiration for a free family trip was also his bait for me and that’s how I was introduced to this professional title: life insurance agent. The job: sell as many policies as you can, meet the targets and get free gifts over and above the commission that is rightfully yours. And what do you do to deserve that money? Nothing. Really, nothing. I did not sit through the 100 hours of mandatory training before the exam because this agent helped me fudge my attendance. And when I cleared my exam, I did not go for any product training. Yet, soon after, I was swamped with SMSes of new policies to sell and target figures to meet. I would also receive SMSes promising added incentives such as trips to exotic destinations.

Obviously, I didn’t sell any policy because this exercise was part of a story to unearth how the masses were being lured into becoming agents and my licence with no business written against my name expired soon after. 

But the experience really described the people who got almost 40% of the policyholders’ money for selling policies they perhaps themselves do not understand. It also exposed the environment in which the distribution landscape existed and continues to exist even now to a large extent. Lack of training, front-loaded incentives and no accountability transformed most insurance agents to con artists, who left a trail of unhappy investors. Seeing through the hard-sell much later, these investors simply refused to fund the policy any further and losing much of their investments in the bargain.

But for an industry that depends on a continuous stream of premium income, also known as renewal premiums, it is disconcerting to see complete apathy to the malaise in their distribution system. A good look at the products that were built like investor traps and the puzzle begins to unravel itself; you start understanding why despite such high rates of customer dissatisfaction and lapsation, insurers have made profits and reported double-digit business growth consistently.

As a rookie reporter some six years back, I would meet a lot of agents posing as an interested customer to get a sense of how Ulips were sold. It’s true that Ulips were sold as a three-year product, promising double-digit return in a short span of time, but one such instance is worth mentioning. A bank representative while dishing out the benefits of a Ulip handed me the brochure. A quick glance at the cost told me that the insurer would keep 70% of my money as premium allocation charge in the first year and if I surrendered the policy after the first year, I would get nothing back. Yet for the bank representative, a three-year horizon was good enough for a double-digit return.

This explains why insurers did not raise an alarm in the face of high lapsation rates and why agents continued mis-selling. Fat charges in the policy ensured they were able to recover most of their costs and high lapsation only translated into profits for the companies. So while the agent made his money from the sale of policies and the insurers made profits out of lapsation, you and me became the losers. Yes, we were sold these policies as a money-doubling vehicle, but we are responsible, too, for falling into such traps. We buy them in the last-minute rush to save taxes or we simply don’t read through the brochures to understand the product, when we can if we take the trouble to do so. But the mis-selling engulfed the investments of even those who are simply not equipped to understand the intricacies of a bundled financial product.

For an industry that is regulated and yet is reeling under rampant mis-selling, it is quite astonishing to know that there is no data on how much the investors have lost. ....thinks it is deliberate on the part of the insurer to not give out data on how much investors lost. Mint Money struggled with the information at hand to arrive at an estimate of how much the investors lost in the last 7 years. So if the industry collected Rs.3.7 trillion worth of premiums from the sale of fresh regular premium policies in the last seven years, we the investors lost Rs.1.56 trillion. (My note = 1 trillion = Rs 1 lakh crore and India's budget in 2012 was of Rs 14 lakh crore approx )

So far the insurance regulator has attacked the roots of the problem. Surrender charges are capped and costs have been contained so that there is an automatic focus on the persistency of a policy. But we still need to cover more ground. As rightly pointed out by an industry veteran, we should ask why did the insurers move the lapsed money to their profit and loss account when it belonged to the policyholders? Another pertinent question is how can we get justice for the people who have lost their money to insurance mis-selling.

Chit funds and not Cheat funds ! Weapon of mass destruction

Collective Investment Schemes (Chit funds ) under regulatory scanner in Bengal

This is one investment avenue which is growing at a dangerous level in the villages. One should be very carefuol while dealingwith these. I came across a good article on this , which one should know  (by Namrata Acharya / Kolkata Dec 23, 2012, in Business Standard )

A few days back, members of the West Bengal assembly practically wrestled on the floor of the House. The reason: an adjournment motion moved on chit funds by the Left Front (LF). The unprecedented scene in the assembly was, however, a culmination of events that go back to the LF rule, when former housing minister Goutam Deb alleged that money was flowing from chit funds into television channels that were being used to defeat the Left.

Political rhetoric apart, concerns over chit funds have been voiced over the last couple of weeks from different quarters. Recently, Reserve Bank of India ( RBI) governor Duvvuri Subbarao said chit fund companies were working under the banner of multi-level marketing (MLM) companies, but the onus of regulating them was with the state government. The Securities and Exchange Board of India( Sebi) has also taken a stern view, cautioning investors against collective investment schemes of some companies.

Multi-level marketing companies

Small investments, which have been a big concern for regulators, have their roots in MLM companies, which work in the principle of “referral marketing”, where one salesperson is not only compensated for selling a product, but also for roping in other salespersons. Most MLM schemes are in the business of agro products and real estate in West Bengal. These companies offer financial instruments like secured debentures, bonds and even limited liability schemes, under which they offer partnership to investors in real estate projects. The returns assured to investors under these instruments vary from 20-50 per cent in a two-to-three-year time frame.

All these schemes are collectively referred to as collective investment schemes (CIS), a financial instrument recognised by Sebi since the 1990s. During the late 1990s when the government noticed that certain entities were operating in the securities markets, who issued instruments against investments such as agro and plantation bonds by offering very high rates of return, the government decided to bring them under the vigil of Sebi under the CIS category.

The rule made all CIS operators to get registration certificate from Sebi to float new schemes and operate the existing ones. While there is no authentic data in the public domain to ascertain the amount of money raised through CIS schemes, that West Bengal has become a melting pot for most of them is no secret. According to Surya Kanta Mishra, leader of the Opposition in the West Bengal assembly, a few chit funds have raised about Rs 15,000 crore to Rs 16,000 crore from small investors over the past few years.

Financial instruments floated by companies to raise money include instruments like Potato Bonds, which offer assured returns to investors between 20-50 per cent in 15 months, according to a company salesperson. The company that has floated the bond is in the business of agro-products, and exports potatoes to south-east countries.

The payments to the investors are made from the repayments it gets from exports. Another agro-based company, in the business of seed exports, has been offering an assured 40 per cent return for investments in its secured debentures.

Potato, and seed bonds apart, there are teak, plantation, agro and even donation bonds doing the rounds in the market.

Under regulator's glare

The risks which CIS schemes carry stem from the huge asset-liability mismatch. Most companies raising money through CIS are in the business of real estate and media, that have a long gestation period. Thus, the repayments are from fresh deposits.

According to the rating rationale of I CRA: “Such schemes are extremely speculative. The rating revision takes into account (the company's) substantial debt repayment obligations over the short to medium term, which is likely to result in significant cash flow mismatches for the company.” Thus, most debt obligations by the company are being met by fresh debt, which makes the investment a high risk one.

“Sebi cannot remain a silent spectator in the case,” notes the markets regulator in one of its orders. Last December, RBI initiated action against two companies for raising public money without approval. “No registration certificate has been given to any CIS scheme. Prosecution process is on in some cases,” said a Sebi official based in Kolkata, requesting anonymity.

Added the managing director of the company against whom the Sebi notice was issued: “We have all the necessary documents to raise deposits.”

Chit Funds and CIS

Apart from CIS schemes, unregistered chit funds are another source of worry for regulators, even though the mode of operation of the two are entirely different. In September 2011, Somen Mitra, a Trinamool Congress MP, had written to Prime Minister Manmohan Singh, saying: “Chit funds are collecting deposits mostly from the guileless rural and semi urban public, unrestrained by any regulatory administrative mechanism, luring them with the promise of sky-high return.”

By promising as high as 200 per cent return to investors in one or two years, several unregistered companies have been siphoning off money in rural areas. Chit funds are regulated by the state government under the Money Circulation Banning Act. But there are enforcement issues in West Bengal, which keep such companies operating in the state, according to B P Kanungo, regional director--West Bengal, Sikkim and Andaman and Nicobar Islands, RBI.

However, the chit fund association has been irked by clubbing registered chit funds with flimsy investment schemes. “Here (under MLM mode), most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. The only problem as far as we are concerned in this context is that they are not conventional chit companies registered under Chit Act 1982. They are mostly residuary non-banking financial institutions. Due to lack of awareness, our image is getting spoiled,” said T S Sivaramakrishnan, general secretary, All Indian Association of Chit Funds (AIACF).

In spite of regulations

In spite of regulatory supervision, MLM companies have been operating unabashed. According to a senior RBI official, there are legal loopholes which allow companies to raise money, skipping regulations.

Most of these companies have been raising money from the public as advances. According to Companies (Acceptance of Deposits) Rules, 1975, companies can raise deposits as advances, but the period of repayment cannot be less than six months or more than 36 months. According to an RBI official, most MLM companies have been resorting to this clause to raise funds from the public, but not many stick to the clause of repayment timeline. “Also, such companies prefer to drag the matter to court so that they can continue raising funds until a judgment is arrived at,” explained the RBI official.

Another mode of raising funds by MLM companies is through secured debentures. These instrument offers as high as 40 per cent return in one or two years. However, most of the underlying securities in the debentures are overvalued, and thus in case a company fails to repay the money in time, an investor is left with an asset value, much lower than the actual investment.

source : http://www.business-standard.com/india/news/collective-investment-schemes-under-regulatory-scanner-in-bengal/496480/