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Mis-selling of Insurance Products by Banks is on the Rise

Inderpal Ahluwalia 16 October 2017

Have you been sold an insurance product by a bank that was not needed by you? Some banks are using financial data of their clients to exploit them with unwanted insurance products for own profits!

Mis-selling of insurance products

In the last few years, the world economy has gone through depression a few times which has resulted in a devastating economic recession in many countries. Due to cut-throat competition in the financial sector some banks resort to unethical practices to gain more profit to beat competition. Such practices show excellent balance sheet numbers in the short run but prove disastrous in the long run. Attractive commissions and the pressure to be on the top are some of the reasons why this is happening everywhere in the world.

What is bancassurance channel?

Bancassurance means a tie-up between the bank and the insurance company aimed at offering insurance products and insurance benefits to the bank's customers. It has become an effective distribution channel for the insurance company to sell their products. The bank gets commission on every product sold via this channel from the insurance company. Unfortunately it has also become a route for bankers to earn more profit through commissions from selling insurance products. The commission received can range from 0.5% to 10%. A bank can have a relationship with up to three insurers in each of life, non-life and health segments.

What is mis-selling?

Mis-selling would mean unfair trade or business practices, including misinformation of product when selling, fake promise of high returns and loading on products.

The number of complaints about mis-selling of insurance products by banks are on the rise.

How to spot mis-selling?

If things around are a bit unusual then you can sniff something is wrong. Just like when you visit your bank and the executive becomes extra nice to you and invites you to sit around the table to discuss something about your bank account. You sit with the executive and you are told about your bank balance and how it can give you high return instead it just lying in your savings account. If the approach is aggressive, the chances of you being mis-sold a product is relatively high.

In another instance if your requirement is for a bank locker or any loan, remember there is no compulsion to buy an insurance product with it. Not suggesting you should not buy an insurance product to protect your loan but if it is not needed then don't give in to the aggressive push by the bank executive. The practice of pushing such products leads to forced buying experience and can end in mis-selling. To secure your loved ones from a home loan which is a big amount you can opt for pure term insurance cover.

Likewise, you may go to a bank to open a fixed deposit but you may be advised to invest in an equity-linked product blindly without checking your risk profile or disclosing the risk factors to you. The worst cases are of senior citizens who are gullible and give in to any advice they get from the bank executives.

For eg – Mrs Sharma who is a senior citizen wanted to invest INR 1 lakh from her life savings in equity linked saving scheme. She understood that there will be a three year lock in period. She was however shocked when INR Rs 1 lakh was deducted from her account in year two. After approaching the bank she got to know she was sold ULIP plan instead of equity linked saving scheme. When Mrs Sharma went to the bank looking for the person who had sold her the policy she was informed that the person no longer works for the bank. No one was ready to take responsibility for this mis-selling incident that had happened. With bank shrugging off the responsibility, Mrs Sharma had nowhere to go to complain further and this only added to her worries.

Mis-selling of financial products is hard to catch because products are sold through a verbal sales pitch. In the case of banks, the sales are made to existing bank customers who, because of their relationship with the bank, buy into the sales pitch of their trusted bank executive. Once the verbal pitch is over, the customer simply signs the documents which is pushed across the table by her own Relationship Manager.

According to a report from the Economic Times, the government also wants to assess existing incentive structures at banks for selling insurance products, after Central Vigilance Commission (CVC) flagged the issue of mis-selling. RBI has taken initiative and from June 2017 banks will be held responsible if found mis-selling any third-party products. Hope this regulation will help curb the mis-selling of insurance products to its clients.