RBI directs banks to shift wealth management services to subsidiaries

The Reserve Bank of India (RBI) has directed Indian banks to split wealth management and investment advisory services to avoid conflict of interest as well as address the problem of mis-selling of financial products, by creating a subsidiary.

The central bank has asked banks to get its approval for the creation of wealth management subsidiaries, which could then be registered with the market regulator Securities and Exchange Board of India (SEBI).

RBI on Friday released 'Draft Guidelines on Wealth Management/Marketing / Distribution Services' offered by banks.

RBI said the guidelines have been prepared on the basis of an investigation carried out on a report of alleged involvement of some banks in structuring transactions to aid tax evasion and fraudulent transfer of funds. The investigations revealed the need for better regulatory compliance by banks, RBI said in its web site release.

RBI's monetary policy statement for 2013-14 also had indicated that banks offering wealth management services (WMS), which include referral services, investment advisory services (IAS) and portfolio management services (PMS), are exposed to reputational risks on account of mis-selling of products, conflicts of interest, lack of knowledge and clarity about products and frauds.

The monetary policy statement had also indicated that detailed guidelines on marketing and distribution of third-party financial products would be issued in the wake of the irregularities observed in banks offering such services. RBI had also proposed to issue comprehensive guidelines on wealth management and marketing/distribution services offered by banks.

As per extant guidelines, banks are allowed to market insurance and mutual fund products as agents of other entities on non-risk participation basis.

RBI noted that in some cases, banks do not have clear segregation of duties of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products. Such practices may lead to mis-selling and distortion of the staff incentive structure.

RBI has advised banks to ensure:

• Segregation of the marketing function from the approval / transactional process at bank branches;
• Ensure that employees do not receive cash / non-cash incentives directly from insurance companies, mutual funds and other third party product providers; and
• Have a board approved policy to avoid mis-selling and conflict of interest in marketing and distribution of own or third party financial products.

To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory / fund management as well as marketing, the RBI panel had proposed segregation of the two functions," the report said, adding the bank should have an 'arm's length' relationship with its subsidiary.

The panel also suggested that the RBI should continue to supervise the bank's activities done through the subsidiary.

Last month, RBI had said it would issue draft guidelines to address mis-selling of financial products and structure of transactions to aid tax evasion and fradulent transfer of funds.