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Saturday, June 08, 2013

Identifying each individual in financial firms that performs customer-facing functions

by Suyash Rai.

The growth of the Indian financial system has generated opportunities for individuals to get jobs in sales and distribution roles. It is easy for individuals to switch jobs, and with that it has become easier to indulge in abusive practices, enjoy the financial benefits that accrue, and leave the firm before the consequences become visible. There is ample anecdotal evidence about sales persons and agents who have got away scot free after doing the wrong things. These individual stories add up to the overall evidence at the level of the financial system of an upsurge of difficulty in consumer protection.

This problem is greatest with agents, who can switch between firms more than employees can. Similarly, sales persons switch easily from a field such as banking to another such as insurance.
For many in this field, the prevailing notion is that some individuals in sales and distribution are bad eggs and must be stopped. While there is some value in this perspective, it is important to not blame the entire failure of consumer protection in India upon individuals. Deeper reform of the system is required, as is envisaged in the consumer protection framework of the draft Indian Financial Code.

While we strive to build systems that generate better financial health for consumers, even in the most pro-consumer system, it will be possible for individuals to indulge in abusive practices, and leave before the consequences show up. This is because of certain inherent features of financial products and services:

  • For many products (eg. pensions), the consequences take years to be realised.
  • Much of the discussion between a salesperson/advisor is verbal, and, even if a written advice is insisted on, it is possible to lie or mislead an unsuspecting consumer.
  • Internal control systems usually work with random checks, and do not catch everybody, but consumer abuse must be comprehensively prevented or redressed.

Logically, this potential for harm goes with the potential for doing good - outliers will be on both sides. Ex-post action on consumer abuse must involve understanding what happened, compensating consumers, and punishing those responsible. This has a deterrent effect as well. In the present system, if the individual has moved on, little can be done against him. The firm has to take responsibility, and it has no recourse to the individual.

This is a malady, and a system must be developed, at least within the financial system, to keep track of individuals. This is important not just for punishment, but also for research on how different profiles, trainings and experiences lead to different consumer outcomes.

A recent initiative pushes in this direction. Association of Mutual Funds of India (AMFI), under direction from SEBI, has now notified regulations that speak to this concern. Every individual (employee or agent) dealing with the consumer is now required to be assigned an Employee Unique Identification Number (EUIN), which will be a permanent number. EUIN can be used to keep track of the individuals even as they switch jobs. This is a good step, but, given the generic nature of the sales/advise skills, this will work well only if all sub-sectors in finance adopt this approach.

The registration requirement in the Indian Financial Code

When something needs to be done by everybody, it is a good idea to put it in the law in some form. The draft Indian Financial Code (IFC) encodes this idea of identifying the individuals who deal with consumers. Section 104 of the IFC mandates every financial service provider to ensure that any individual dealing with consumers in connection with the provision of a financial product or financial service is registered with the Regulator. The provision also empowers the regulators to specify pre-conditions for registration in respect of different financial products or financial services.

Registering individuals with regulators will be expensive. Nothing in the IFC prevents the regulators from allowing self regulatory organisations or product manufacturers to implement the process and send a batch file to the regulators, who would just supervise the integrity of the process. The draft Code does not interfere with such efficiency.

If this provision is enacted, over time, the database of registered individuals will develop. It will start showing interesting patterns, and firms and regulators will be able take preventive measures, as well as strict action against abusers. The idea is necessary and will go a long way in solving this malady.


SEBI and AMFI are doing an interesting thing. In the short term, it will have a limited effect as IRDA and RBI and FMC and PFRDA are not part of this initiative. In addition, we should see consumer protection as a much bigger question, of which pinning responsibility upon employees is only one component. When the Indian Financial Code is enacted as law, the capacity building that would have taken place at SEBI and AMFI in building the EUIN will be a useful building block.


  1. Consumer protection laws in the country are very weak. The different authorities in India over the last decade have done well to promote new businesses. However, no effective and quick solution consumer protection laws have been set up. Personally, kingfisher airlines owes me Rs 10,000 for cancelling flights themselves (in October last year). Yet to get a refund from them. Filed a complaint in the "Jago Grahak Jago" website two months ago. Have not received any kind of response. Seems like they are themselves sleeping and asking consumers to keep awake and struggle. I would just like to say: "Jago Government Jago"

    1. I agree that the consumer protection laws in the country are weak, and we must fix the laws if we are to make progress. To see a new approach on consumer protection in finance, I encourage you to do read Part IV of the draft Indian Financial Code:

  2. Yes, I really look forward to such a system being implemented. I nearly received a court summons because an Airtel salesperson advised me to do something that was illegal as per their rules (and I didnt realise that) in an effort to reach his sales target. It was a real learning experience and unfortunately, it usually takes these kind of incidents to heighten consumer vigilance and awareness, at a huge cost to unsuspecting customers.

    Such a system is badly required and the sooner, the better!

  3. You may want to look at the National Skills Registry ( for an example of a white-list initiative. The features could include uniquely identifying the work force and continuity of employment, as well as adding certifications. A complementary approach would be to set up an industry-wide blacklist of persons found involved in malpractices and dismissed by the employers after following a due process. Both are required to bring in the necessary culture of trust and accountability.

    Use of technology to improve transparency in the customer acquisition phase and call backs to detect instances of mis-selling will also help, apart from proper structuring of the incentive plan.


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