Better consumer protection on the anvil

Recently, RBI has announced the draft charter which envisages effective rights to consumers

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 this area in 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 to the modern needs.

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 expect that financial literacy and education will bring awareness in customers. In later type, it is the responsibility of the service provider to make sure customer aware about the product under consideration. Another important 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.

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 analysts confuse with different products like ETF, credit default swaps etc. It is common experience that customer, when he buys or opts for any financial or insurance product, just sign the terms and conditions agreement without reading it. Mostly because, the document will be massive and even if somebody tries to read it, they can’t, because it is written in a highly technical jargon. Only in very few cases, the financial service providers (FSPs) will explain the details of the agreement. The customers and FSPs will be having 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 high transaction costs involved.

To put an end to these confusions, RBI has announced the draft charter which comes up with five rights to consumers, including 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?

The fair treatment and transparency prohibit any kind of discrimination on grounds of gender, age, religion, caste and physical ability. FSPs should make sure that contracts are unbiased and clear. It is clear that these clauses shift the responsibility from customer to FSPs. On the other hand, if we dig a 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 data falling into wrong hands. Customer has a right to give minimum data and it is the FSPs responsibility to preserve it carefully.

The grievances and compensation are ex-post redressal mechanisms. The idea is that the more stringent these systems are, they will 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, it 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 may object that it will reduce their powers.

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