Bank of Russia warns against misselling (How banks cheat depositors)

03.06.2021 13:52
Bank of Russia warns against misselling

    The website of the Central Bank of the Russian Federation is notably constantly showing materials on misselling - deliberate attempts by financial institutions to sell under the guise of one financial product another, without explaining the significant differences between the products and the possible risks in the execution of the contract.

    Misselling practices

    Depositors are offered, instead of a regular deposit, to conclude an investment or endowment life insurance contract, to buy units of investment funds, to transfer money into the trust management of an investment company.

    While talking about high-interest rates, managers of financial institutions "forget" to mention that all these products are not covered by the deposit insurance scheme, in the case of the organization's closure the client may not receive compensation from the government. 

    In case of early termination of the contract, the client will receive a refund less than the amount paid when entering into the contract.

    Endowment life insurance: what to pay attention to?

    A special warning from the Bank of Russia was issued for endowment life insurance. 

    Managers of financial organizations don't explain to clients how this financial product works, some clients are not aware that contract of endowment insurance must be paid annually. A reminder from the financial institution about this feature of the contract on the eve of the next instalment comes as a real shock to unsuspecting savers. Many are unable to make this payment. The financial institution uses arrears as grounds for terminating the contract and the clients lose their money.

    Additional payments are not all that managers of financial institutions are silent about when they offer an insurance contract instead of an ordinary deposit. 

    The yield on an endowment insurance contract of up to 13-15% is not guaranteed, unlike the modest interest on a deposit. Endowment insurance is sold by banks, but the client enters into an agreement with an insurance company.

    If you read the standard contract carefully, the annual return on endowment insurance is 3%. Investment income is calculated based on the insurer's performance. In practice, it does not exceed 6% and the interest does not accrue on the whole amount but only on the part which forms the reserve. 

    Endowment life insurance: cancellation of the contract

    The minimum term of a funded insurance contract is 5 years.

    It is not possible to terminate the funded insurance contract without suffering a loss. The contributions are not refundable, the client is only offered to collect the redemption amount.

    The redemption amount includes a part of the reserve and the additional investment income earned during the term of the contract. The redemption amount only reaches the amount of the contributions made at the end of the contract; before that, the amount of the redemption amount is less than the current contributions.

    When cancelling the contract, the client is required to submit a statement from the tax office that the client has not received any tax deductions under the contract. If there is no statement, the insurance company will deduct an amount equal to the tax deduction from the client's money. 

    If the insurance company goes bankrupt, the client will not receive a cent from their premiums - the financial services offered by insurers are not covered by the mechanism of state guarantees.

    This is not the first time the Central bank of the Russian Federation has addressed financial institutions, pointing out the inadmissibility of misselling. In less than two years, eight dozen reports have appeared on the CBR's website on the subject of misselling.

    The regularity of the repetitions indicates - financial institutions are in no hurry to comply with the regulator's requirements. 

    Banks have been rebuked for prohibited practices towards clients in the past, and recently the rebukes have been coming with increasing regularity. The situation is absurd - leaving your savings in a bank is getting closer to the level of risk than playing the stock market.

    The Broex team is not encouraging you to invest all available funds in cryptocurrency due to unscrupulous individual financial institutions. We would like to draw your attention - if you decided to save and multiply your funds - carefully consider the conditions of the transaction, the tools by which you want to save your assets and earn money. The safety of your funds depends only on you.

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