Taking on banking snake oil salesmen

Tighter regulation over mis-selling of financial services such as loans, insurance and MFs was long overdue. With RBI plugging a glaring gap in oversight, household savings will have one layer of defence against being channelled into unsuitable avenues. But the extent of the malaise is enormous, and regulation as envisioned does not address the underlying information asymmetry that causes it. People will still learn about the benefits of a financial investment from those who stand to profit. For a nation that implicitly trusts physical savings like property and gold, the spread of financial literacy remains grossly inadequate. Mis-selling affects savings behaviour and, unless right correctives are applied, it contributes to capital inefficiency.

Improvements in transparency and deterrence are a necessary first step as a new generation of savers widen their horizons. The horizon is shifting outward due to financial innovation, not all of which may be appropriate for the stage of financialisation of the economy. There are strict rules on what can be stocked on the shelves of India's financial supermarkets. Equally strict rules are needed on telling shoppers how these could affect their financial health, particularly for new products where customers have no context beyond the labelling on the package.

Since distribution and information travel on the same networks, regulation must be balanced. The structure of financial markets requires tightly integrated sectoral oversight. The ultimate objective of informed consumer choice, however, is a bigger social endeavour beyond the scope of financial regulators. Not only does an individual need to be educated about making money, but she also needs to learn how much of it should be spent and where to park what is left over. This understanding comes about through an all-of-society approach. Regulators can ensure that the quality of information is acceptable, but its dissemination requires an agency they do not possess. Neither is it available intergenerationally.