Regime Shift in Indian Customer Protection Law

The way great charter, magna carta, gave liberty and rights to the people of England, the charter of customer protection by Reserve bank of India is expected to give protection and rights to India customers. Recent announcement of draft charter of customer protection by RBI is another move in the bigger reforms in the area of customer protectionin India. Currently, consumer protection is in abysmal state and it was never given this importance as in the recent days. The age old consumer protection act, 1986 could not cater the modern needs.

As part of the financial inclusion, government is trying bring another 20 crore people into the formal banking and to give financial access. Most of them arefor the first time exposed to banking and financial services. These novice customers and customers in general have to be protected from the malpractices of the financial service providers (FSPs). The financial sector legislative reforms commission (FSLRC) felt the need to reform and strengthen consumer protection due to frauds reported in the recent times (ULIPs, mis-sale in mutual funds, Sahara, saradha chit funds and many more) and by observing changes world over, especially in Australia and USA. The financial redressel agency is one of the seven agencies that the FSLRC prosed to set up to reform financial sector in India.Then, RBI appointed a committee on comprehensive financial services (CCFS)in 2013 under the chairmanship of Nachiket Mor, which recommended a framework for customer protection in the lines of FSLRC recommendations.

World over the customer protection undergone different regime shifts in recent times. There is a shift from “Buyer Beware” type system to “provider responsible”type system. In former type, the customer protection regulations mandate the information disclosure and expects that financial literacy and education will bring awareness in customers and makes them choose right. But studies showed that financial literacy does not have much impact on financial behavior. In later type, it is the responsibility of the service provider to make sure customer aware about the product under consideration. Anotherimportant shift here is towards “suitability” based regime. Australia came up with Future of Financial Advice Act, 2012, which penalizes the firms for mis-sale of products. In USA, “suitability” issue was given due consideration in Dodd-Frank Act when it comes to consumer protection. This is because, the high valued mortgage loans were delivered to less credit worthy borrowers and which in turn created a housing babble and led to financial crisis.

Coming back to India, the exponential growth of dubious financial products in the recent times made the financial system highly complex. For a layman it is an alien and at times, even specialized analystsconfuse with different products like ETF, credit default swapsetc. It is common experience that customer, when buy or opt for any financial or insurance product just sign the terms and conditions agreement without reading it. Mostly because, the document will be so massive to read and even if somebody try to read it, they can’t, because it is written in a highly technical jargon. Only in very few cases, the FSPs will explain the details of the agreement. The customers and FSPs will behaving completely different views and claims on the same product. Even though a proper consumer court system and regulatory protection system exists in India, it is operating in a very inefficient way due to time consuming process and due to high transaction costs involved. To put an end to these confusions and difficulties, RBI has announced draft charter of customer protection.

The draft charter of consumer protection by RBI is a final product emerging from the broader recommendations from both FSLRC and CCFS. Itfinally comes up with five rights to consumers. Right to fair treatment, transparency, suitability, privacy, grievance redress and compensation.Each one of these represents different stages of ex-anti and ex-post buyer and seller relationship. Now, the question is, how far these recommendations can be implemented? And whether these policies will succeed? What kind of institutional setup is required to implement these successfully?

The fair treatment and transparency prohibit any kind of discrimination on grounds of gender, age, religion, caste and physical ability and FSPs should make sure that contracts be unbiased and clear. It is clear that these clauses shift the responsibility from customer to FSPs. On the other hand, if we dig little deeper, fair treatment and suitability looks conflicting. In the name of unsuitability, FSPs may resort to unfair treatment.

Next, right to privacy of data is very important element. These days, data is considered wealth. Most of the reported financial frauds are due to the fact that data fallen into wrong hands. Customer has a right to give minimum data and it is the FSPs responsibility to preserve this data carefully.

The grievances and compensation are ex-post redressal mechanisms. The idea is that the more stringent these systems are the less violations by FSPs. At present, depending on fraud, grievances redressal takes place in different levels. First, in house mechanisms address the issue.Then, if the issue is not settled, issue can be taken before RBI ombudsman, SEBI’s SAT, IRDA grievance cell or grievance redressal cell of NSDL, then comes consumer courts and courts.In a new system, it is recommended for a unified Financial Redress Agency (FRA), which is will address the grievances in all the sectors. But, if that is the case, regulators object that this will reduce their powers and it may allow other complexities to pop up.

Finally, It is a very good sign that India is reforming its customer protection systems but the success of this charter depends on the how well these rights are implemented and how well the new institutions like FRA will function. Hopefully, “achi din’ will be coming soon for Indian customers.