In order to curb mis-selling of third party products by banks, RBI has introduced sweeping changes in the way banks sell mutual funds and insurance schemes in its guidelines on investment advisory services of banks.
RBI has mandated banks to register with SEBI under Registered Investment Advisor (RIA) norms to distribute third party products like mutual funds. The banking regulator has clarified that banks will have to segregate other departments of the bank and the investment advisory services of banks. It has asked banks to form a subsidiary to offer such services and instructed them to maintain an arm’s length distance between banks and its investment advisory subsidiary.
In the circular, RBI has said, “IAS is defined and regulated by SEBI under the SEBI (Investment Advisors) Regulations, 2013, and entities offering these activities need to be registered with SEBI. In view of the same it is advised that henceforth, banks cannot undertake IAS departmentally. Accordingly, banks desirous of offering these services may do so either through a separate subsidiary set up for the purpose or one of the existing subsidiaries after ensuring that there is an arm’s length relationship between the bank and the subsidiary.”
Further, RBI has instructed banks to adhere to KYC in accordance with their respective regulators to distribute third party products.
Earlier, in June 2013, RBI had issued a draft circular on wealth management services of banks in which it had proposed that banks should offer their wealth management services (PMS, referrals and investment advisory services) through a separately identifiable division or department (SIDD). The subsidiary would be required to register with SEBI.
“Mis-selling raises serious consumer protection issues. Further, as observed from the recent allegations, wealth management activities as well as marketing third party products can expose banks to serious reputational risks. Bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products,” stated the draft released on June 28, 2013.
RBI has given bank a time-frame of three years to banks to comply with these norms.
