What is mis-selling and why is it done?

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2 What is mis-selling and why is it done? Making false promises that cant be fulfilled. Hiding certain aspects that may hamper your business. Not disclosing all details to clients. It is done with an intention to meet targets and to remain in the race. It is also done as employees are not trained properly and lack knowledge.

3 Mis-selling practices in Sales False Promises of: Free account opening. Lower brokerage rate. Hiding charges applicable in the Demat account. Fixed returns or guaranteed profits. Advisory services for every client. Quick account opening in 2 days. Precautions to be taken: RM must inform clients of all applicable charges and no verbal promises should be made. Client should receive a verification call about all charges and the number of days it takes to open an account. Copy of the form should be available to the client post account opening for him to refer to the rates. Welcome letter should also list the basic features of the A/c.

4 Mis-selling practices in Sales Mis-selling of Advance Brokerage plans For example, Client opts for: Advanced brokerage plan of Rs He thinks: He has got a lower brokerage rate at the cost of keeping a refundable deposit with the broker. He finds out: After his advance brokerage plan expires, his money is refundable to the extent of the amount of brokerage he generates and not the entire amount. Precautions to be taken: RM must take the time to explain the pros and cons of each plan. The product note must contain all the product characteristics giving the client explicit examples. Client should receive a verification call explaining the product to him before the account is opened. When client changes a plan online, he must accept terms and conditions to ensure that he has read and understood the product he has opted for.

5 Mis-selling practices in Sales Unethical practices: Not checking Risk appetite: Offering accounts to low risk clients like (senior citizens, lower income housewives) without analyzing their risk appetite. Trading Risk: Making retail clients trade in derivatives and currencies without their full understanding of those particular segments. Precautions to be taken: RM should be made to understand the consequences of trading in low risk clients accounts and how people can be affected financially if they are burdened with a big loss. Take a separate declaration from senior citizens that they understand the risk associated with trading in the stock markets and in particular derivatives. Calling all clients who trade in derivatives to make them understand the risk.

6 Mis-selling practices in Dealing Unethical practices: Unauthorized trades Hiding high brokerage rates (for example, brokerage on penny stocks) Unauthorized Portfolio management by dealer. Precautions to be taken: Client s confirmation before placing an order and post market order confirmation should be made mandatory for all dealers. SMSs or can be sent to clients after the trades have been executed stating the stocks bought in the account, quantity and price. Brokerage rates must be disclosed by the dealer in case higher rates are charged on certain stocks. Take periodic Ledger Balance Confirmations Back Calling by Internal audit to the Top loss making clients on quarterly basis

7 Mis-selling practices in Dealing Wrong recommendations Personal recommendations in case of company recommendations Circulation of unauthenticated news Precautions to be taken: Clients can be sent SMSs and s of our recommendations so that they are also aware of the in-house recommendations. To prevent circulation of unauthenticated news, out going mail can be banned to all employees below a certain grade. Ban the use of mobile phones in a dealing room to avoid circulation of unauthenticated news.

8 Precautions we take at Kotak Securities What does Kotak Securities do to prevent such Mis-selling?? Zero tolerance for Mis-selling Induction Training to new recruits It s all about Sales! Training at periodic intervals Shows various policies in the form of pop-ups on its HRMIS. Have a whistle blower policy Sends regular newsletters to employees. Incentivize good ethical behavior and penalize any wrong-doings. Client Training sessions

9 Steps taken by Regulator to curb Mis-selling

10 Conflict of Interest SEBI circular dated August 27,2013 General guideline for dealing with conflict of interest of intermediaries Policy and procedure to identify/avoid/deal with conflict of interest Client interest to be primary while advising Disclose potential conflict to client such as prop trading etc. Not to have incentive structure that encourage sale of product not suiting client s risk profile

11 Account opening Issue: Terms and conditions in agreement, clauses, charges not clear. Steps taken by SEBI Standard Rights and obligation agreement No contravening clauses permitted in voluntary agreement Agreement clauses to have minimum font size of 11 Copy of agreement to be given to client Obtaining financial proof mandatory for trading in F&O id can t be created by the broker for the client Name of broker, logo, registration number to be mandatorily put in all client communication Standard account opening document, policies, charge structure to be made available on website

12 Trade related Issue: Trading without client s consent Steps taken by SEBI Mobile number and id of the client to be updated in exchange and DP records Exchange sends trade sms and to the clients at the end of the day Even depositories send SMS for off market transfer of security Member to ensure that id, mobile does not belong to sub-broker or employee Margin to be collected at client level for F&O and shortfall to be reported POA to be given voluntarily by the client. To contain details of accounts to be operated by broker and where securities/funds can be transferred Monthly/quarterly settlement of funds and securities mandatory Only statutory & regulatory charges can be levied in contract note

13 Tips/rumors Issue: Tips/rumors floated in market /guaranteed return schemes Steps taken by SEBI Circular on unauthenticated news Employees of stock broker not to communicate any unauthenticated news related to any security without checking with compliance SEBI has cautioned clients against individuals/companies who give stock tips Registration of investment advisors mandatory All advertisements require prior exchange approval

14 Mutual fund/pms Business Product labeling in Mutual funds Blue principal at low risk. Yellow principal at medium risk. Brown principal at high risk. Minimum amount for investment through PMS raised to 25 lakhs Portfolio manager s performance to be made available on website

15 Redressal mechanism SEBI has started website Toll free number to accept investor complaints Wide media campaign to make clients aware of their rights and redressal mechanism Period for lodging arbitration extended to 3 years No arbitration fee for client if claim is below Rs. 10 lakhs Circular dated 26 th September Members need to respond within 15 days of receipt of complaint IGRC to decide on admissibility of claim and pass direction Member may opt for arbitration Client will get claim upto 5 lakh from IPF subject to outcome of award

16 Shared responsibility Mis-selling is selling something not needed by client or making wrongful representation While in short run it may give some benefits, in long term, client would never come back Will hamper the business growth Not Regulator s job but in our interest that Mis-selling does not occur..

17 Thank you..