We must make lasting moves against the mis-selling of financial products

livemint.com:

A recent news report in The Times of India suggests that in order to curb mis-selling, “insurance agents may be required to maintain audio-visual records of [the] sales pitch" they make to prospective buyers of insurance policies. A letter suggesting the same seems to have gone from the Centre’s consumers affairs secretary to the financial services secretary.

While some record of the sales pitch is perhaps better than no record, the move isn’t going to help India curb mis-selling much. Even though the actual mis-selling of insurance and other investment and financial products is done by insurance agents, wealth managers at banks, etc, the push for it comes from the top management.

And this is not just an Indian phenomenon. Martin Wolf has an explanation in The Crisis of Democratic Capitalism: “It is not hard to view corporations as amoral—that is, institutionally incapable of recognizing the distinction between right and wrong or feeling remorse or empathy.

This is not just because, being institutions, they are incapable of feeling anything." It’s also because of how incentives are set up. Commissions are made on getting sign-ups for investment deals lower down the hierarchy, while employee-linked stock options incentivize their growth at higher levels.

This institutionalizes product mis-selling. Further, as Wolf suggests, “Top executives are unlikely to be held personally liable for anything." He offers the example of the global financial crisis—where the financial services industry primarily mis-sold home loans—and its aftermath: “The executives who drove their banks (and the world economy) into the ground, before the global financial crisis, mostly walked off with large fortunes, while tens of millions of innocent