In April 2021, Yes Bank was fined by India’s market regulator for inadequate information disclosure – high-risk bonds were mis-sold to high net-worth investors without accurately informing them about the associated risks and returns. Based on an online survey, this article finds that accurate information disclosure can reduce the odds of consumers investing in high-risk financial products by 80-90%, thereby protecting their rights and interests and maximising welfare.
Mis-selling1 of financial products is widespread in India. Mis-sale is typically driven by information asymmetry between the buyer and seller, where on the one hand, the seller shrouds product features and on the other, the buyer does not know enough about the product to ask relevant questions. In the Indian financial services, several cases of mis-selling have been documented in the past, ranging from insurance agents recommending products that would bring them higher commissions, instead of products that are more suitable for the buyer, or investment-cum-insurance policies being sold to consumers who are interested in putting their money in fixed-deposit products.
Recently, one such incident came to light in the Indian financial services industry – the mis-sale of additional tier 1 (AT1)2 bonds by Yes Bank. In this instance, high net-worth individuals and urban retail investors were mis-sold these bonds with partial and inaccurate information about the risks and returns associated with them. An SEBI (Securities and Exchange Board of India) order, which investigated this matter, found that the Bank misrepresented, manipulated, and mis-sold these AT1 bonds to individual investors.
One way to narrow the scope of information asymmetry and reduce instances of mis-selling, is to mandate information disclosures by financial service providers (George et al. 2013). In fact, mandating accurate information disclosure has indeed been used as a key regulatory tool to curb mis-selling (Halan and Sane 2017). The RBI (Reserve Bank of India) and the SEBI have taken considerable steps over the years to improve regulations around disclosure requirements. Yet, the cases of mis-selling in the Indian financial services industry reveal that the guidelines have merely remained a de jure norm. In this article, we describe results from a study that we conducted3 to understand the impact of information disclosure on consumer behaviour (Agrawal et al. 2021). We evaluate if accurate, simple-to-understand, and concise information disclosure had any tangible effect in altering a consumer’s financial decision.
We conducted an experiment involving an online survey that presented 303 respondents with a hypothetical scenario wherein they had savings worth Rs. 500,000 (US $6,700), that had to be invested in a long-term investment product. The product in question was a hypothetical ‘high-return bond’, with features similar to the AT1 bond. Outreach for the survey was conducted through social media platforms and targetted emails to professional networks, and the respondents were those who volunteered to participate in the survey. Our sample, therefore consisted of urban, highly educated, working individuals, who would typically buy such a product.
In order to assess the impact of information disclosure on the purchase decision, two variations of information disclosure – an ‘accurate’ form and an ‘inaccurate’ form – were created for the same product, and respondents were randomly assigned to one of them. There was an equal probability of receiving either type of disclosure form. Of the 303 respondents that took the online experiment, 171 received the inaccurate form of disclosure, while 132 received the accurate form. Both the groups were similar to each other in terms of their overall socioeconomic characteristics, therefore making them comparable.
The accurate form is named as such as it provides information both on the returns, as well as the costs and risks associated with the purchase of the product. The ‘inaccurate’ form closely mirrors the existing disclosure type for the sale of AT1 bonds that was used by Yes Bank while pitching the product to potential customers. After reading the disclosure form, respondents were asked to make their final decision, that is, based on the information disclosed about the product, would they choose to buy the product or not.
Impact of information disclosure on purchase decisions
Given the risks involved, we expect that an accurate disclosure of information will reduce the probability of purchase, in comparison to an inaccurate disclosure form that focusses more prominently on the returns of the product and shrouds the associated risks. Indeed, we find that our hypothesis is true – the type of disclosure has a large and statistically significant impact on the purchase decision of the respondents. The results from our empirical analysis indicate that the odds of buying the product when exposed to the accurate form are 80-90% lower than the odds of buying when exposed to an inaccurate form. This finding leads us to a simple yet powerful conclusion – when informed of the real risks of a financial product, the consumer is more cautious of a high-risk product and chooses to reject the product4. This is in contrast with a consumer’s decision when only the positive aspects of the product are showcased, and the real risks are glossed over. The magnitude of the decrease in the odds of purchase, based on the type of disclosure, identified by our experiment is an indication of the strong impact that accurate disclosures can have in helping customers make the right choices. Accurate disclosures can, in general, reduce instances of mis-sale of financial products and services, thereby increasing overall consumer trust in the financial system.
Role of regulation
Through this study on the role of information disclosure, we contribute to the literature that studies financial market failures arising from asymmetric information. In this context, mandating information disclosure is seen as a first but extremely important step in improving consumer outcomes and thereby protecting consumers’ rights and interests. This line of research should be further explored across different markets, consumer segments, and financial products to understand the impact of disclosures in a range of settings. Finally, it is worth acknowledging that mandating information disclosure – particularly in the Indian context – comes with its own set of limitations, given the limited supervisory capacity that makes it difficult to monitor the implementation of such a mandate. In such a scenario, regulators need to come up with creative and simple ways in which this requirement is complied with, across the financial services industry. This can only be achieved if incentives for both consumers and financial service providers are aligned, such as in the case of the suitability regime in the UK, eventually leading to the maximisation of consumer welfare outcomes.
I4I is now on Telegram. Please click here (@Ideas4India) to subscribe to our channel for quick updates on our content
- Misrepresentation of a product or service due to which a consumer is misled about its suitability.
- AT1 bonds are unsecured, perpetual bonds that banks issue in order to shore up their capital core and meet Basel-III norms, which are the international norms for maintaining minimum capital in banks.
- The study was conducted by Dvara Research, in collaboration with Monika Halan.
- We also run regressions to examine any heterogeneous impact of disclosure type, based on the attributes of the respondents such as risk preferences, age, and financial literacy, but we do not find any statistically significant heterogeneous effects of disclosure type on the purchase decision of the product.
- Agrawal, N, M Dasgupta, M Halan, M Sharma and M Srinivas (2021), ‘Impact of Information Disclosure on Consumer Behaviour: Case of AT1 Bonds’, Dvara Research Working Paper Series No. WP-2021-01.
- George, D, V Prasad, D Rajendran and A Sahasranaman (2013), ‘A new framework for financial consumer protection in India’, Dvara Research Position Paper.
- Halan, M and R Sane (2017), ‘Regulating Consumer Finance: Do Disclosures Matter? The Case of Life Insurance’, NIPFP Working Paper Series No 212.