Economic Times Article (04 Nov 2012)

HSBC, the world's third-largest bank, has stopped selling insurance and mutual fund products in India. Amid mounting allegations of mis-selling and certain sharp practices, the London headquarters of the British bank, which carried out a "culture audit" of the Indian retail banking and wealth management practices, has ordered a suspension of sales.

HSBC Bank is the largest distributor of mutual funds in the country. The foreign bank, which has been doing business in India for close to 150 years, reported a 30% spurt in commissions on MF sales last fiscal — one of the toughest years for fund houses, life insurers and financial services brokerages.

The parent organization has given HSBC India two months to fix the system in order to ensure that customer complaints came down, said a source. Besides mis-selling of insurance policies, these complaints related to frequent churning of mutual fund portfolios of many well-heeled investors.

Emails from ET to HSBC went unanswered till the time of going to press.

Fund distributors often earn higher commissions by advising investors to shift from one mutual fund scheme to another. Indeed, capital market regulator Sebi in an earlier note had pointed out rampant portfolio churning by many banks. "Churning and mis-selling of insurance happen in other banks and brokerages as well, though the extent may differ. HSBC is possibly trying to correct its system to see that the nature of products meets customers' appetite," said a chartered accountant associated with a fund house.

In many markets, large financial services groups insist that all telephonic conversations between customers and personal bankers or wealth managers should take place on recorded lines. But this may be difficult in markets like India where bank or distributor officials use their mobiles to call clients after office hours.

According to a senior fund manager, HSBC officials recently told CEOs of top fund houses that it would go slow on sales, and in some cases stop selling till further notice.