HSBC-Suchitra Krishnamoorthi case: The moral is do not mix insurance and investment

The saying ‘all is well that ends well’ is trite. But that is only for the person who was tormented or a victim. The lessons learned by her, however, serve as warning to others lest they too are driven to learning from a chastening, costly and heart-wrenching experience.

The Times of India report dated 18 March 2014 says famous singer Suchitra Krishanmoorthi has settled her complaint against HSBC and therefore the matter is no longer a subject of inquiry by the market watchdog, the SEBI. Investors, however, need to know what happened.

[caption id=“attachment_79905” align=“alignleft” width=“380”]  The moral of Krishnamoorthi’s story is HNI or lesser mortal, the best way forward as far as investments by the laity are concerned is mutual fund, ideally open-ended.[/caption]

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For the uninitiated, this is the story: The Sebi issued a show-cause notice to HSBC about four months ago back on a complaint from Krishnamoorthi that the bank mis-sold a product to her, because of which she incurred a whopping loss of Rs 83 lakh only on her investments. In addition, she had also paid a hefty Rs 26 lakh as commission to the bank. The loss she incurred on investments was due to chronic churning of portfolios the bank had done, which in the process forsook its client’s interests. What a denouement for a gullible investor who was promised the moon—24% per annum return on investment under the Portfolio Management Scheme (PMS)!

PMS is a bilateral arrangement between a bank and a high net worth individual (HNI) customer. Banks have the knack of sniffing out HNIs and enticing them into their PMS. The power of attorney (POA) they sign for this purpose is actually their undoing-in a way they sign their own death warrant, so to speak. The POA is a virtual carte blanche that authorises the bank to do pretty much whatever it pleases with the client’s money with a lot of escape routes to wriggle out in case the investments sour to the client’s detriment.

PMSs come under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003. But this does not offer any material relief to the HNI investor. The Sebi norms mandate issuance of an employee unique identification number (EUIN) so that the erring bank staff could be pinned down. At best, the erring bank could be penalized and it in turn can penalize the erring employee but the investor herself comes out a loser under the arrangement. The rather slack oversight over PMS is understandable given the fact that unlike a collective investment scheme which mutual fund investment is all about, PMS is purely bilateral.

An HNI has to fight his own battle in case things sour. That Krishanmoorthi ‘settled’ instead of knocking at the doors of civil courts is revealing. HSBC could easily have taken shelter under the stock, glib excuse that the stock market is inherently risky and churn is a necessary ingredient to quick gains. Moreover, she in any case had authorised the bank to do what it did. The ToI report says the terms and quantum of settlement cannot be disclosed thanks to the non-disclosure clause in the settlement.

Such a clause is a face-saver for either of the parties or both. Settlement pre-empts bad publicity for the bank. Be that as it may, her experience holds tremendous lessons for both HNI and lesser mortals. An HNI may be wooed and flattered with a chaperon treatment inside a bank by a person called relationship manager who never talks except in dulcet terms. Little does the HNI realise that s/he is eyeing his wallet, the bank balance. The carte blanche given vide the PoA is the passport for mindless and reckless dalliance with risk by the bank on behalf of the client.

Both HNI and lesser mortals must realise that there is nothing like a hassle-free investment. If a person doesn’t watch his investments and surrenders to lassitude, some rapacious monster would take over. True, in a rising market when the going is good, the HNI would make money but when chips are down and it comes to the crunch, his gains could vaporise in no time.

Unlike PMS, mutual fund investment being collective has the safety of numbers. In PMS, the relationship manager can be callous and blas but a fund manager of a mutual fund scheme especially an open-ended one has to be constantly on guard because people enter and exit freely on a daily basis, guided by the net asset value (NAV) of the scheme.

The market monitors him almost real time. He has to reckon not only with the market risks but also with the dreaded and grim prospect of redemption pressure. Redemption pressure is relentless when investors get scent of inept handling of their money by the fund manager.

It spells doom for those staying put as well because the fund manager willy-nilly has to sell out his portfolio to keep his commitment to those wanting to exit. The short point is the sheer number sobers down the fund manager. A relationship manager of PMS is untrammelled by such restraints secure in the knowledge that his contract is but with an individual.

The moral of Krishnamoorthi’s story is HNI or lesser mortal, the best way forward as far as investments by the laity are concerned is mutual fund, ideally open-ended. Never mix investment with insurance is a warning that can be ignored only at one’s own peril. Krishnamoorthi’s money was available both for investments and insurance in the hands of the PMS scheme operated by HSBC. Small wonder bulk of the money found its way into ULIPs that are half investments and half insurance?

She also happened to be the victim of mindless churning that was the norm those days-shift from one scheme to another so that the front-loaded commissions are maximised. That she lost as much as Rs 29 lakh as commission to chronic tinkering is as much a commentary on the avarice of the bank as on Irda which stepped in after a lot of damage had already been done-it ordained that commission would not be front-loaded but would be spread over five years which discourages mindless churning.