The RBI intends to crack down on the conflict of interest arising in the Indian financial services sector. It has set up a working group on this.
There have been complaints from bank customers who have been advised by bank staff to invest in mutual funds' "initial public offerings". In a move to garner greater fee-based income, banks are pushing the sale of mutual fund and insurance products to their depositors.
"We have received a lot of complaints and will entrust this issue to the working group on conflict of interest in the Indian financial services sector," said an RBI deputy governor.
"The problem of conflict of interest is a global phenomenon. Investment bankers could have a vested interest in selling an equity issue where they are lead managers. Credit rating agencies could equally be charged with having a conflict of interest. There could be cases where an entity might get a higher rating than what it deserves. The consultancy services wing of the rating agency could be asked to prepare a report for the corporate entity and the fee for the report could help the entity get a higher rating," said banking sources.
Likewise, auditing firms may have a Chinese wall between the auditing and consultative process for a single entity. However, the fact that it is undertaking both for the same company might give rise to a conflict of interest.
While the RBI has no wish to come down on cross-selling by banks, it has received numerous complaints where the customer had no idea what he was getting into in terms of entry and exit loads (for investing in mutual funds).
The RBI is likely to adopt global best practices and push for greater disclosure by financial intermediaries, said sources.
"We do not wish to get into a prescriptive mode or do micro-management," said RBI governor Y V Reddy. Financial services intermediaries would need to offer greater disclosures. "If a bank is earning commission, it will need to declare this upfront to the customer," said sources close to the development.
The RBI deputy governor further added that the central bank is not too pleased with banks deriving funds through other means, especially at a time when the credit deposit ratio is in excess of 100 per cent.
Under the lens
Who's being watched: Firms pushing third-party products like rating agencies, auditing firms, investment banks and commercial banks
Why: RBI wants to end the conflict of interest in the financial services sector