Bringing quality in financial services The industry must ensure that its members are trained better and do not promote mis-selling

There is a peculiar problem in the financial services industry. A large number of distributors empanelled by mutual funds and insurance companies are inactive. Banks and broking houses also report that relationship managers, who have been recruited and trained, are unable to post adequate sales. There is a general hue and cry about a stringent regulatory regime and how it has curtailed the growth of the business. There may be a different story at play—a case of sheer lack of quality and disrespect for process.     In the interest of the investor, it is important that those who sell financial products and services are put through a qualification process. The minimum qualifications required to be able to sell financial products can include age, experience, a certain level of education and mandatory certification. The minimum qualifications prescribed by regulators are also called gatekeeping requirements. The objective is to ensure that those approved by the regulator alone can become authorised selling agents. In the Indian markets, the sellers of financial products preceded the introduction of certification by the regulators. The gatekeeping function came after thousands were already inside. This presented a problem of vested interests.     A stringent qualification process would affect the existing players, their sales, profits and points of presence. The prescribed exams are simple and easy, and mostly cover basic areas of knowledge. There are also exemptions offered based on age and experience, which allow seepage of low quality advisers into the system. There are routine and persistent representations to the regulator to make these qualifying criteria even more lax, under the guise of enabling the 'expansion and penetration' of the industry to a larger population. Everyone implicitly abets the thinking that a large number of people should be let in, as a pre-requisite to achieve growth of the business.     The prescription of an exam creates a market for coaching. There are training programs that help in tackling these mandatory examinations. A good number of these are actually discussions of the test papers. Question banks for most of the mandatory exams are in the public domain, obtained easily from those that attempt the exam. The end result is that the industry is filled up with low quality resources that have not learnt even the basics of what they need to know.     How did this army of sellers become inactive and inert? In the good old days, selling of financial products meant selling 'new' products. Two common features underlying all these products were the push from advertising, publicity and high commissions. This enabled the under-qualified agents to make a sale and also earn attractive incentives, including trips to exotic locations and memberships to exclusive clubs. All they needed to do was approach an investor with a printed pamphlet, rattle out the product features, encash on the familiarity created by ads and the media buzz during the offer period, and make a sale.     Regulators tightened the screws on new products, refused to approve lookalikes, reduced or abolished front-end commissions on selling and made it tough to ride on product proliferation. Quite expectedly, the easy route to revenue, by rewarding performers who lacked in knowledge and competency, is over.     A business with low entry barriers not only holds poor quality people, but also reeks of unfair practices. Mutual funds point out how good the long-term performances of their flagship schemes have been. But investors complain that they have not earned it. This is because a large number of investors were sold NFOs, several of which are still underperforming. The selection of funds in a typical investor's portfolio is mostly a reflection of aggressively offered NFOs, than any careful selection of suitable products with track record. The horror of discontinued policies contributing to the profits of distributors and insurance companies is a shame. Stripped of the ease of selling new products with its incentives and wary of investors who are hitting back, it is not a surprise that a large number of relationship managers and distributors are unwilling or unable to meet investors to do any business.     The responsibility now, is to bring back quality. To do so, financial service businesses need to take two critical steps. First, ensure that both entry-level and ongoing training is relevant, robust and rigorous. If a job requires a defined level of competence, it is foolhardy to expect performance without it. Second, define a sales process that requires sellers of financial products to disclose all relevant details to the investor to enable informed decision-making. The investor needs to know how the product would work, what the risks and returns are, what are the costs, terms and conditions and the suitability of the product to his needs. A good business will prescribe, mandate and implement a sales process that fights mis-selling in its own ranks, without waiting for the regulator to fix the problem.     These measures need serious investment in people and process, and waiting through a period of low revenue and profits. There is no short cut to building trust.