MUMBAI // In a radical effort to curb misrepresentation of financial products, India's insurance regulator has introduced tough guidelines on telemarketing that will come into force in October.
The rules by the insurance regulatory and development authority (Irda) require insurance agents to record all calls while soliciting new customers by telephone.
If an insurance policy is bought, the agent must disclose his commission from that transaction. The customer will be entitled to a copy of the recording at any time until the settlement of the claim.
"Full disclosures shall be made to the clients under all modes of distance marketing, and the requirements of confidentiality, privacy and non-disclosure shall be complied with," Irda said.
The rules are the latest tough regulations introduced in recent years to bring about transparency in India's fast-growing insurance sector, in which malpractice such as the misrepresentation of financial products is common.
In recent weeks, Irda has also run large advertisements in newspapers warning the public against fraudsters masquerading as insurance agents.
"BEWARE" screams a signboard held by a comic character dressed as Superman in an ad. "There are certain fraudulent phone calls by persons claiming to be employees of Irda trying to sell insurance policies," it says, advising readers to report such calls to the nearest police station.
India's financial services sector contributes 15 per cent to the country's GDP. The sector's contribution is expected to exceed 17 per cent this year as the country's high savings rate - 34 per cent and expected to reach 35.3 per cent next year - offers the financial markets new opportunities to grow.
The US$41 billion (Dh150.58bn) insurance industry is among the strongest contributors to the sector's growth. The lobby group the Life Insurance Council says India is the world's fifth-largest insurance market and expects it to grow into a $66.8bn market for insurance products this year. There are 23 life insurers in India with total assets of 13 trillion rupees (Dh1.07tn).
As the sector booms, competition has led to a rise in fraud cases. A growing pool of 3 million agents for retail financial products - 2.8 million in the insurance sector alone - caters to 188 million investors.
"At the heart of mis-selling lies the conflicting interests of the agent and the consumer," says Harsh Roongta, the chief executive at ApnaPaisa, a personal-finance web portal.
"If the agent makes his commission when the sale is consummated, rather than when the consumer himself makes money, then he is likely to push products that earn him the highest commission rather than those that fit the needs of the consumer."
The lack of financial literacy and greed for unrealistic returns has worsened the rate of such fraud, Mr Roongta says.
"Consumers clearly prefer products that provide guaranteed returns which are much higher than can justifiably be provided," he says. "Mis-selling seeks to fill this insurmountable gap that should actually be filled in by consumer education."
In December, Indian authorities arrested a relationship manager from Citibank on charges of fraud - amounting to 3bn rupees - related to the misrepresentation of investment products to some high net worth individuals in the northern town of Gurgaon.
Shivraj Puri, the man accused, is alleged to have used fake investment documents to lure potential customers with a high double-digit rate of return.
To curb the misrepresentation of financial products, Irda has also ruled that single-premium, unit-linked insurance plans with an annual premium exceeding 100,000 rupees cannot be marketed by phone.