The shopkeeper finds out why you are buying a product & sells a basic, low price product as your requirement is such. The refrigerator mechanic looks at the fridge & finds that it is not cooling properly as a plastic bag was blocking the air vent. He takes a nominal Rs 100 for the visit and refuses to charge the usual Rs 500, as there was no work involved. An insurance agent asks why you want to buy a policy and when he understands that you don’t require insurance otherwise, suggests investment in PPF.
Do these things happen in real life? They do happen… but very rarely. There is a vested interest in all of us and we all act based on what is in our best interest. This happens across industries. The self-interest is so strong & our greed so endemic, that self-regulation seldom works. We see excesses in virtually every industry, even though some of them are regulated.
The 2008 financial crisis itself can be traced to such unbridled greed which led to the birth of exotic instruments that couched the true nature of the underlying products. It was a deception & fraud of such proportions, that it precipitated a global crisis. Selling unsuited, costly products is a malaise worldwide in the financial services industry.
Volkswagen was an example of fraud in the automobile field where they had a cheat software that got triggered, when emissions were measured. Medical field is replete with unethical practices – doctors suggesting costly medicines in collusion with manufacturers, suggesting unwanted procedures, suggesting C-Section when normal birth would have been fine etc. Recently, National Pharmaceutical Pricing Authority of India has brought down the stent prices to between Rs 7,000 to Rs 30,000. The stent manufacturers and importers were making profits between 250% to 1000% & the citizens were reeling under the onslaught of high medical expenses borne out of profiteering & lack of scruples.
This is happening in industry after industry. We have become accustomed to people taking advantage of us, in every way. We are perpetually forced to be on the lookout. Caveat Emptor is the reigning sentiment with people – they have no choice.
Consumer protection is hence raising its head everywhere & the incumbents are not liking it, one bit. But, once there are regulations, does it work? Not always.
Regulations impose the base minimum standards which an industry participant has to comply with. In industry after industry, regulations are complied with grudgingly and to the minimum extent possible. But that is hardly the intent of the regulation, which assumes that the participant will take the regulation as a guiding factor & rise well above the minimums, which it seeks to impose.
In financial services industry too, regulations have been closing in as the citizen at large had been taken for a jolly ride. More than in any other field, financial services impacts the well-being of a person, nay, their very survival based on what financial decisions they take and which products they buy.
This is where ethics come into the picture. Ethics are the moral principles which govern a person’s behavior. Some people are endowed with it. Many others are not blessed with it. That is why regulations are required in the first place so that they can prescribe the basic minimum standards to adhere to. This then becomes the hygiene factor; the bar which everyone needs to jump over.
But in every industry, we need torch bearers who will go far beyond the call of regulation. That is when the industry will acquire credibility & respectability.
Fiduciary standard is now becoming an important component – often the centerpiece of the financial services regulations worldwide. This is a higher standard which imposes huge responsibility on the adviser, whereby the adviser places the client interest even higher than one’s self interest. Hence, the regulation of today may seem bullet proof. But even here, those that want to merely comply with regulations can get away with doing the minimums!
An example – in the Investment Adviser Regulations 2013 by SEBI, fiduciary standard is imposed on those coming under the regulation. This regulation also imposes other responsibilities like getting remunerated by client only and not by product manufacturers. The intent in this case was to create true blue advisers who are completely aligned with client’s interests and who represent only their clients.
I heard some advisers the other day discussing about whether SEBI RIAs can sell products coming under the purview of other regulators. To me, the question looked self-evident – one cannot sell any commission bearing product whether the product comes under the purview of SEBI or not. That’s because of the principle of representing the client’s and their interests alone and not having any conflict of interest. If one were to have inducements in the form of commissions, an adviser cannot rightfully say that they are acting only in their client’s best interests. They may probably be complying with the regulation in form but certainly not in spirit.
This essentially is the problem. When you buy a bathing bar, there is nothing wrong with it. But it is not a soap, which the customer mostly thinks it is! When you buy a tea blend thinking it is tea, again nothing wrong there. But read carefully – it has a whole lot of things other than tea, like tapioca! Are these manufacturers misleading people? From regulatory standpoint, they may not be. But, ethically, they are misleading the public by offering something and leading them to believe it is something else.
Ethics is a scarce commodity – in finance & elsewhere. Finding someone who acts in the true spirit of the professional standards who goes beyond the call of mere regulatory requirements are those who become legends in the profession.
Let me end with an anecdote. A sculptor was bringing to life a statue. An onlooker sees another similar statue in the room and asks whether he is creating another one of the same type. Continuing his work, the sculptor replies that the other statue is flawed & hence he is creating a new one. The onlooker inspects the other statue and is not able to find any flaw. Intrigued, he asks the sculptor as to where the flaw is.
The sculptor stops work, walks around to the other statue and points to the nose, where there was a small chip on the otherwise flawless nose. The onlooker then wanted to know where the statue would be placed. The sculptor, shows him a place high above on the temple roof. The onlooker is very surprised – “If the statue is going to be placed 40 feet above the ground, no one will know there is a flaw. So why are you making another statue?”. The sculptor quietly says,” But, I know it has a flaw!”
That is what integrity & ethics is all about. It is what you display when no one is looking. It may be difficult to comply with such high standards. It’s rare. It’s priceless. That’s why those who have it, are valued very highly – they straddle their profession like a colossus.