A lot of dust has been raised about the write-down of additional tier 1 (AT1) perpetual bonds of Yes Bank—about its technicalities, its fairness, et al. The loss is a moment to pause and ponder how financial products are sold and the lack of understanding of associated features and risk factors. Let’s take the term mis-selling as selling a product by highlighting or exaggerating the positive aspects and suppressing the limitations or risk factors and the suitability of the product for the requirements of the customer.
To start with, when you purchase any product, be it a mobile phone or a laptop or an investment product or even a holiday package, you agree with the terms and conditions. It is a different issue that we click on the “I agree” button without reading the terms and conditions, as if reading it is a nuisance. The risk is on us, and I cannot say, if it comes to crunch, that I agreed without reading the terms. However, when something is a little out of the way and requires an enhanced level of understanding, then there is a higher level of dependence on the seller of the product. This, in turn, requires that the seller of the product is equipped with adequate knowledge and communicates the basic risk factors to the customer. In AT1 perpetual bonds, though the customer agreed to the terms by purchasing it, there is a broader question. That is, whether the person selling AT1 perpetual bonds is aware of the risk features.
The risk features of AT1 bonds are: coupon skip/discretion, wherein the coupon (interest) can be paid only from profits or certain defined reserves; loss absorption, which is what we are going through now, in the context of Yes Bank; conditions for write-down, like in the case of Yes Bank; and the call option and when it can be exercised (usually five years from date of issue and every anniversary thereof).
There are several questions here. Are the sales personnel at the multiple banks, who sold these AT1 bonds to individual customers are themselves aware of the features mentioned above? If yes, was it communicated to the investors? If no, who is responsible—the individual or the bank assigning the sales targets? Who is the regulator for banks selling AT1 bonds to individuals—the Reserve Bank of India or RBI (the regulator for banks) or the Securities and Exchange Board of India (the regulator for secondary market trades in financial instruments)?
The culture of selling any financial product as “a fixed deposit” or, in the case of AT1 perpetual bonds, “even better than fixed deposits” given that the coupon rate is higher than the interest rate on deposits and the issuer is a bank can be dangerous.
That is why we need to fix certain responsibilities. Be it RBI or Sebi, a regulator has to take charge. Moreover, the organization selling the financial product has to take charge. It can’t behave like an individual at the sales counter, fresh from a management course, with a load of sales target.
Also, there needs to be a minimum eligibility requirement of the sales personnel at the counter, which cannot be just a management degree or diploma, but which involves hardcore understanding of products and product suitability. Approval of third-party products by the regulator (generic approval) and minimum product suitability audit by the regulator (specific individual cases) is also important.
There are relevant parallels, in the context of fixing responsibility, in other industries. For instance, for selling insurance products, the benefit illustration has to be signed by the customer. In mutual funds, every product is approved by Sebi and the investment adviser has to record the client risk profile and the rationale for the advice, which is audited by Sebi. A mutual fund CEO was fined by Sebi for an investment decision in a fund, in his individual capacity i.e. he had to pay the fine from his pocket.
Even today, there is a debate going on, in the context of Yes Bank AT1 bond write-down, that one particular issuance of 2013 of a quantum of ₹280 crore has not been written-down, but other AT1 bonds worth ₹8,415 crore have been written-down. The point is, these technical aspects (for example, why one series was not written down) require an enhanced level of understanding of product features, beyond sales targets. The finer aspects of selling financial products—for example, deciding the allocation to various asset classes like equity and debt or being aware of the pay-off structure in a market-linked debenture or risk factors of AT1 perpetual bonds—should be left in responsible hands, and not with someone who just has the gift of the gab.