Mystery shopping allows the regulators and policy makers to check and monitor whether the distributors and manufacturers are adhering to the code of conduct in true spirit.
A man entered a reputed bank with a gun and Rs. 2 lakhs. On entering he shot a bullet in the air and shouted “If somebody tries to move from their seat and try to convince me for any life insurance policy, ULIP, or RD I will start firing. I just came here to deposit money in my account.”
This WhatsApp joke sums up the state of affairs in banks peddling third party products to customers. Hence, market regulators across the world conduct ‘mystery shopping’ to find out whether distributors adhere to the code of conduct in true spirit. This exercise is usually done by regulators to identify the bad apples and take appropriate steps to deter mis-selling.
By definition, mystery shopping is not limited to financial markets. In fact, it is adopted by a number of companies across sectors to audit their performance. There are many agencies which help companies conduct mystery shopping. This exercise can be conducted through telephone calls, emails or face-to-face depending on the company’s objective of conducting the research.
Mystery shopping agencies appoint auditors to carry out this task and the auditor is usually not aware of what the companies/regulators are trying to document.
Let us look at one example. Diya (mystery shopper) wants to park her money in a short term product to meet her immediate goal. She approaches her bank RM to help her invest the money for 6 months. In order to meet his targets, the relationship manager recommends her to invest in a ULIP which comes with a five-year lock in. The RM should have ideally recommended her to park the money in a term deposit or a liquid fund. Here, Diya was a mystery shopper participating in the research on sales practices in banks. Divya will note down her experience and share the same with the agency appointed to conduct this exercise. These results are shared with the regulator.
Market regulator SEBI has conducted mystery shopping exercises to see if the entities it regulates adhere to its best practices in letter and spirit.
In 2015, MF executives say that SEBI had conducted a mystery shopping exercise by sending its representatives in the AMC Investor Awareness Program (IAPs) to find out if they were conducted in the manner specified by SEBI. In the CII MF Summit held last year, SEBI Chief U K Sinha had shared some of the results of this exercise. He had said that onsite visits by SEBI officials at 18 locations across 22 AMCs found that only 18% of the venues had genuine investors. “In 65% of the cases there was no surety whether the program would be held. In 6% of these cases they were distributor events,” Sinha had said.
Here is one more example of a mystery shopping organized by Monika Halan, Consulting Editor, Mint and Dr. Renuka Sane of Indian Statistical Institute - Delhi. This research was funded by NSE–IFMR Finance Foundation Financial Deepening and Household Finance Research Initiative. The research was conducted at 200 branches in Delhi across public, private and foreign banks. Here are some of the findings of this research:
- Bank managers don’t make an effort to understand the client.
- Overall, fixed deposits were the most recommended product, followed by insurance and mutual funds
- 99% of return disclosures in insurance were incorrect; 86% in mutual funds (MFs) were incorrect; and 100% of disclosures on costs on life insurance products were incorrect.
- In private sector banks with high sales incentives, the high commission product (i.e. insurance) is recommended. In public sector banks, where there are deposit mobilization targets, fixed deposits are recommended.