Saturday, April 27, 2013


By K P C Rao, FCS
Practicing Company Secretary


Consumer protection law or consumer law is considered an area of law that regulates private law relationships between individual consumers and the businesses that sell those goods and services. Consumer protection covers a wide range of topics, including but not necessarily limited to product liability, privacy rights, unfair business practices, fraud, misrepresentation, and other consumer/business interactions.

In India, the Consumer Protection Act, 1986 provides for quasi-judicial adjudicatory machinery at three levels i.e. District, State and National levels called District Forum, State Consumer Disputes Redressal Commission and National Consumer Disputes Redressal Commission.  The Act covers ‘goods’ as well as ‘services’.

However, the vulnerability of consumers reflects a major gap in Indian financial regulation, as the institutional framework governing India's financial sector was built over a century. As such, the FSLRC recommends the adoption of a consolidated, non-sector-specific, consumer protection framework for the entire financial system that will empower and require regulators to pursue consumer protection for the financial activities regulated by them. In this context, this Article focuses on the recommendations made by the Commission.


Consumerism is a social and economic order that is based on the systematic creation and fostering of a desire to purchase goods or services in ever greater amounts.  It also may refer to a movement seeking to protect and inform consumers by requiring such practices as honest packaging and advertising, product guarantees, and improved safety standards. In this sense it is a movement or a set of policies aimed at regulating the products, services, methods, and standards of manufacturers, sellers, and advertisers in interests of the buyer. In economics, consumerism refers to economic policies placing emphasis on consumption. In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society.

Due to globalization and opening of Indian markets to foreign players Indian consumers today have an access to innumerable brands. In every industry whether it is fast moving consumer goods (FMCG) or durable goods or service industry there are more than twenty brands at national level catering to the needs of the consumers. This situation of plenty is giving the consumer an opportunity to choose goods and services from a wide spectrum. But is the consumer getting value for money?  Why is consumer protection becoming more important in today’s scenario? Is the concept ‘let the buyer beware’ still exists? or Are we moving towards consumer sovereignty?

II.      THE DOCTRINE OF ‘CAVEAT EMPTOR’ (‘Let the Buyer Beware’)
The philosophy behind the rule of ‘caveat emptor’ was basically the reliance placed by the buyer on his own skill or judgment. It is based on the fundamental premise that once a buyer satisfies himself as to the suitability of the product for his use, he would subsequently have no right to reject the same.
Concepts like ‘fitness of goods’ and ‘merchantability’, which could be used to shift the burden as to quality and fitness on the seller, were not encouraged and the buyer could not reject the goods on any ground. The rule of ‘caveat emptor’, as it prevailed at the times of its origin, was quite rigid.
Thus it can be noted that the law being bent in the favor of the seller, and in those times, one could not even contemplate a corresponding rule, which would put the burden on the seller (caveat venditor).
A misconception and need for change
Approach, which was being adapted when the rule of ‘caveat emptor’ prevailed in its absolute form, was later characterized as one detrimental to the development of trade and commerce. Therefore a scenario wherein a buyer would not have any recourse against a seller who has in spite of being aware of a latent defect (one which cannot be detected by reasonable examination) not informed the buyer about the same, would certainly not encourage commercial transactions.
In order to provide adequate protection to the buyer who buys the good in good faith, which case laws put as, ‘reliance on the skill and judgment of the seller’. Thus in order to give proper recognition to the relationship between the buyer and the seller and to generate a scenario wherein commercial transactions are encouraged by the means of proper checks, the rule was subsequently diluted.
Shift in Conceptual Thinking
The rule of caveat emptor, as far as judicial precedents goes, for the first time suffered a blow by the case of Priest v. Last[1] wherein for the first time, the reliance placed by the seller for the purposes of buying a ‘hot water bottle’ was taken into account for the purposes of allowing the buyer to reject the goods. This decision was the first traceable decision in common law which gave importance to the reliance placed by the buyer on the seller’s skill and judgment. This proposition of law, however is a settled principle of law today.
The Priest decision however, was just a beginning of what could certainly be termed as the diminishing process of the rule of ‘caveat emptor’. Where in this decision, the purpose was expressly mentioned and then taken into account, the courts in subsequent cases, opined that the need/purpose of the contract would be evident from the nature of the contract, or might be known to the seller from the course of negotiations between the parties. Thus express mention of the purpose behind a purchase of goods was no longer considered a requisite for proving reliance on the skill and judgment of the seller, which signified a further shift of law in favour of the buyer.
This imposition of obligations upon the seller was also not a smooth process in itself. The House of Lords in the case of Ashington Piggeries Ltd v. Christopher Hill Ltd[2] , where on one hand the majority opined that a generalized purpose should be shoehorned within the meaning of a particular purpose thereby meaning that when the buyer purchases food-stuff meant for animals, he need not mention specifically the type of animals he would feed with the food-stuff. On the other hand the dissenting opinion of Justice Diplock, while rejecting the majority opinion, clearly said that ‘the swing from caveat emptor to caveat venditor had gone too far.’ Another decision, which goes with the opinion of Justice Diplock, is the decision of New Zealand Court of Appeal in the case of Hamilton v. Paparika wherein the court refused to accept the contention that a water supplier supplying water to horticulture farms should ensure that its water would not harm a specific crop i.e soil less cherry tomato. The court opined that since the water was serving the generalized purpose in the given case, so any particular purpose should have been communicated to the seller and he could not have known the same by implication.
Thus, the valid argument which can be construed out of these case laws is that concerning the variation between the nature of the particularized purpose and the generalized purpose.’ But this has an equally sound counter-argument, which is that it should be incumbent upon the seller to specify that his product, which is sold for a generalized purpose would not suit a particular purpose. Or that the product would have to be used in a particular manner in order to serve a particular purpose. This counter-argument is where one can trace the origin of caveat venditor i.e. the need for disclosure on the seller’s part.
III.      THE DOCTRINE OF ‘CAVEAT VENDITOR’(‘Let the Seller Beware’)
With its origin being traced in the need for disclosure of information for the purposes of facilitating the reason for purchase of the buyer, gradually this rule has gained prominence and the obligations of the seller have been given proper shape along with various statutes and case laws limiting the rule of caveat emptor to ‘reasonable examination’. Examples like beer contaminated with arsenic, milk-containing typhoid germs are good enough to establish that courts have been generous enough to exempt the buyer from the duty to examine the goods where the defects could not have been traced in ordinary circumstances.
Another major debate which arises from the above obligation of the seller to make proper disclosure is concerning cases where the seller himself does not come to know of the defect. Where on one hand a learned scholar on sale of goods Benjamin has opined that the seller cannot take the excuse of himself not being aware of the defect in goods, case laws like Harlingdon & Leinster Enterprises Ltd v. Christopher Hull Fine Art Ltd[3] on the other hand suggest that where the buyer himself has more expertise in a given field than the seller, it would be wrong to suggest that the buyer could have the right to reject the painting sold to him on account of not being of the original painter.
It is however submitted that Benjamin’s opinion in this regard should be taken as over and above the mandate of judicial precedents, because when the buyer places reliance on the skill and judgment of the seller, the fact that the seller does not possess the same can nowhere be held as a justifiable excuse. Therefore a duty does lie by law on the seller to be aware of the conditions of the goods being sold and making the buyer aware of the same. The various tests for merchantable quality of goods also go on to indicate the same when they emphasize on the ‘full knowledge’ of the buyer as to the quality of the goods.
Therefore the rule of ‘caveat emptor’ is dying a slow death and is being taken over by the subsequent rule of ‘caveat venditor’, the change being attributed to a more consumer oriented market wherein commercial transactions are being encouraged. Such a change, no doubt would help to create an appropriate balance between the rights and obligations of the seller and the buyer. In this context the comments of Lord Wright which are relevant reproduced here:  The "old rule" of caveat emptor had been superseded by caveat venditor, such change being "rendered necessary by the conditions of modern commerce and trade" Let the buyer beware’ is not a phrase that judges use very often nowadays. The age-old rule of caveat emptor rule, which has its origin in common law, has over the times undergone major changes. As the rule was being given a concrete shape, its exceptions also grew with time. Therefore this conceptual change would center around the balancing point of the necessity of disclosure of information by the seller on one side and implications of reasonable inspections done by the buyer on the other.


Consumer protection consists of laws and organizations designed to ensure the rights of consumers as well as fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors; they may also provide additional protection for the weak and those unable to take care of themselves. Consumer protection laws are a form of government regulation, which aim to protect the rights of consumers.
Consumer interests can also be protected by promoting competition in the markets which directly and indirectly serve consumers, consistent with economic efficiency, but this topic is treated in competition law. Consumer protection can also be asserted via non-government organizations and individuals as consumer activism.
Consumer protection law or consumer law is considered an area of law that regulates private law relationships between individual consumers and the businesses that sell those goods and services. Consumer protection covers a wide range of topics, including but not necessarily limited to product liability, privacy rights, unfair business practices, fraud, misrepresentation, and other consumer/business interactions.
Position in US
The Consumer Movement in United States of America has grown from a minor component at the turn of the century’s progressive movement into fixture on the current American Political Scene.  The growth of consumerism in US can be better understood by briefly discussing three areas of consumer activism in United States of America. This followed the application of rules like Caveat emptor or buyer beware and the law of supply and demand. Consequently certain degree of quality assurance and convenience has been introduced. Combined with advertising it induced consumers to ask for particular versions of goods rather than generic goods.
In the United States a variety of laws at both the Federal and State levels regulate consumer affairs. Among them are the Federal Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), Truth in Lending Act (TILA), Fair Credit Billing Act (FCBA), and the Gramm-Leach-Bliley Act (GLBA). Federal consumer protection laws are mainly enforced by the Federal Trade Commission and the U.S. Department of Justice. At the State level, many states have adopted the Uniform Deceptive Trade Practices Act.
Position in UK
The United Kingdom, as member state of the European Union, is bound by the consumer protection directives of the EU. Domestic (UK) laws originated within the ambit of contract and tort but, with the influence of EU law, it is emerging as an independent area of law. In many circumstances, where domestic law is in question, the matter judicially treated as tort, contract, restitution or even criminal law. Consumer Protection issues are dealt with when complaints are made to the Director-General of Fair Trade.
Republic of China (Taiwan)
Modern Chinese law has been heavily influenced by European civil law systems, particularly German and Swiss law. The Consumer Protection Law (CPL) in the Republic of China (Taiwan), as promulgated on January 11, 1994 and effective on January 13, 1994, specifically protects the interests and safety of customers using the products or services provided by business operators. The Consumer Protection Commission of Executive Yuan serves as an ombudsman supervising, coordinating, reporting any unsafe products/services and periodically reviewing the legislation.
Position in Australia
In Australia, the corresponding agency is the Australian Competition and Consumer Commission or the individual State Consumer Affairs agencies. The Australian Securities and Investments Commission have responsibility for consumer protection regulation of financial services and products.
Position in Germany
A minister of the federal cabinet is responsible for consumer rights and protection.


On April 9, 1985 the General Assembly of the United Nations passed a Resolution adopting a set of guidelines for consumer protection and authorized Secretary General, United Nations to persuade the member countries, especially the developing ones to adopt policies and laws for better protection of the interests of the consumers. India being one of the signatory to the Resolution enacted the Consumer Protection Act, 1986 to fulfill its obligation.  The Parliament enacted the legislation in December 1986, which came into force on April 15, 1987.  The main objectives of the Act are to provide for better protection of the interests of the consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumers’ disputes. The Act also provides for quasi-judicial adjudicatory machinery at three levels i.e. District, State and National levels called District Forum, State Consumer Disputes Redressal Commission and National Consumer Disputes Redressal Commission. 

Importance of Consumer Welfare

Consumerism, importance of consumers in the market, increasing awareness among consumers are some of the important milestones in the development of consumer affairs in India. A country’s economy revolves around its markets. When it is a seller’s market the consumer exploitation is the maximum. When there are large number of buyers and sellers, consumers enjoy a number of choices. Before enactment of the Consumer Protection Act, 1986 India had a sellers’ market.

Further liberalization of our economy in 1991 gave opportunity to Indian consumers to get quality products at competitive prices. Earlier in order to protect our own industries government restricted foreign competition. This led to a situation where consumers were getting very few choices and quality wise also our products were inferior. For purchase of car there used to be a huge booking and there were only two brands available. Nobody bothered about consumer interests and the attitude was towards protecting our own industry.

Thus, the need for consumer satisfaction and consumer protection was recognized. A consumer is considered as an inevitable part of a socio-economic political system, where the exchange initiated and transaction realised between two parties, namely buyers and sellers has an impact on a third party i.e, society. However, the inherent profit motive in mass production and sales also offers the opportunity to many manufacturers and dealers to exploit consumers. Problems of defective goods, deficiency in service, spurious and duplicate brands and misleading advertisements are rampant and often the gullible consumer falls prey to it.

This paved the way for enactment of the Consumer Protection Act in 1986. The provisions of this Act cover ‘goods’ as well as ‘services’. The goods are those which are manufactured or produced and sold to consumers through wholesalers and retailers.  The services are in the nature of transport, telephone, electricity, housing, banking, insurance, medical treatment, etc.  To make the Act more effective and meaningful, necessary changes have been brought by Consumer Protection (Amendment) Act, 2002, which came into force w.e.f March, 15, 2003. This is based on the basic rights of consumers as defined by the International Organisation of Consumer Unions (IOCU) viz the Rights to Safety, to information of Choice, to be Heard, to Redressal, to Consumer Education, to Healthy Environment and to Basic needs.

a)     Background
The Finance Minister announced the formation of the Financial Sector Legislative Reforms Commission (FSLRC) during his Budget speech of 2011-2012 to rewrite and harmonize financial sector legislations, rules and regulations. This had become necessary as the institutional framework governing India's financial sector was built over a century. After a detailed study, the FSLRC submitted its Report to the Government of India on 22/03/2013. The Report is in two parts.
Volume I – Text of the findings and recommendations and  
Volume II – Basic framework of a draft law.
The Report dealt at length the aspect of the protection of financial consumer. The terms “consumer”, “retail consumer” and “eligible enterprise” are defined in the draft Code to mean:
(1)   Consumer: A person who has availed, avails, or intends to avail a financial service or has a right or interest in a financial product.
[Whereas under section 2(d) of the Consumer Protection Act, 1986 a consumer is defined as follows:
Consumer means any person who—
(i)     buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose[4]; or
(ii)   hires or avails of any services for a consideration which has been paid or promised or partly paid and partly prom­ised, or under any system of deferred payment and includes any beneficiary of such services other than the person who 'hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purposes].
Therefore, the Consumer Protection Act, 1986 covers ‘goods’ as well as ‘services’. The goods are those which are manufactured or produced and sold to consumers through wholesalers and retailers.  The services are in the nature of transport, telephone, electricity, housing, banking, insurance, medical treatment, etc. 
(2)  Retail consumer: A consumer that is an individual or an eligible enterprise, if the value of the financial product or service does not exceed the limit specified by the regulator in relation to that product or service. The regulator may specify different limits for different categories of financial products and services.
(3)  Eligible enterprise: An enterprise that has less than a specified level of net asset value or has less than a specified level of turnover. Each of these caps will be specified by the regulator.

b)     Key Components of the Financial Legal Framework
The Commission has envisaged certain key components of the financial legal framework. Each of these components is guided by a clear understanding of market failures. From this perspective, the Commission envisioned tasks of financial law as the following nine components:
(1)  Consumer protection
(2)  Micro-prudential regulation
(3)  Resolution
(4)  Capital controls
(5)  Systemic risk
(6)  Development and redistribution
(7)  Monetary policy
(8)  Public debt management
(9)  Foundations of contracts and property

As regards the Consumer protection the commission remarked that a prime motivation of all financial regulation is to protect consumers. The relationship between financial firms and their customers is one where, many times, the outcomes may harm customers. These problems are not sporadic or accidental; but are often rooted in basic problems of information and incentives and will not be alleviated through financial literacy campaigns. The central purpose of financial regulation is to intervene in the relationship between financial firms and their customers, and address market failures. This requires a comprehensive consumer protection framework that covers both the problem of prevention (interventions that induce financial firms towards fair play) and cure (addressing consumer grievances).

The Commission in its Report has observed that the vulnerability of consumers reflects a major gap in Indian financial regulation, which needs to be addressed. As such, the Commission recommends the adoption of a consolidated, non-sector-specific, consumer protection framework for the entire financial system that will empower and require regulators to pursue consumer protection for the financial activities regulated by them. In this context, the draft Code approaches the problems of consumer protection on two fronts: (1) prevention and (2) cure.

(1)  Prevention: Prevention requires regulation-making and enforcement across the entire financial system from the viewpoint of consumer interests. For example, looking at questions of remuneration and conflicts of interest, when a sales agent sells a financial product to a household, and gets paid a fee by the producer of this financial product, is there a problem with conflicts of interest? How do we evolve a structure where the provider acts in the best interest of the consumer? Regulators should be obliged to grapple with questions such as these.

The consumer protection part of the draft Code has three components:
(1)  an enumerated set of rights and protections for consumers,
(2)  an enumerated set of powers in the hands of the regulator, and
(3)  principles that guide what power should be used under what circumstances.

The details of consumer protection would, of course, lie in the subordinated legislation to be drafted by financial regulators.

The Commission further observed that in India, so far, the financial regulatory structure has been defined by sector, with multiple laws and often multiple agencies covering various sectors. This has led to inconsistent treatment, and regulatory arbitrage. Regulators have sometimes been lax in developing required protections out of notions of facilitating growth in the industry. These problems would be reduced by having a single principles-based law which would cover the entire financial system. It seems the Commission believes that an overarching principles-based body of law would allow regulatory flexibility, consistent treatment of consumers across all aspects of their engagement with the financial system, fairness and ultimately a more stable financial system.

Preventive tools

(a)  Certain protections are provided to all financial consumers.
(b)  An additional set of protections are provided to unsophisticated or retail consumers.
(c)  The regulator is given a list of enumerated powers which it can use in order to implement these protections.
(d)  The regulator will be guided by a list of principles that should inform the exercise of its powers.
(e)  The regulator has been given the power to supervise financial service providers and initiate enforcement and disciplinary actions.

(2)  Cure: The Commission proposes the creation of a unified financial redress agency. The redress agency is expected to have front-ends in every district of India, where consumers of all financial products will be able to submit complaints. Modern technology will be used to connect these front-ends into a centralized light-weight adjudication process. A well structured work-flow process will support speedy and fair handling of cases. Consumers will deal only with the redress agency when they have grievances in any financial activity: they will not have to deal with multiple agencies.

The complaints brought before the redress agency will shed light on where the problems of consumer protection are being found, and thus suggest areas for improvement in subordinated legislation. As such, a key feature of the redress agency will be the creation of a feedback loop through which the computerised case database of the redress agency will be utilised by the regulator to make better regulations on a systematic basis.

Curative tools

(a)  Creation of an independent financial redress agency to redress complaints of retail consumers against all financial service providers.
(b)  A research program, applied to the data emanating from the redress agency, will feed back to the regulator and thus enable improvements in its work.

c)     Objectives and Principles
The objectives of consumer protection are to guard consumer interests and to promote public awareness. While pursuing these objectives, the regulator will be empowered to make regulations to determine the manner and extent to which the protections under the law will apply to the users of different financial products and services.

(a)  Objectives

The consumer protection part of the draft Code will direct the regulator to pursue the twin objectives of:
(1)  Protecting and furthering the interests of consumers of financial products and services; and
(2)  Promoting public awareness in financial matters.

(b)  Principles to guide the regulators
The regulator must consider the following principles while carrying out any functions or exercising any powers relating to consumer protection:
(1)  The level of protection given to a consumer and the level of responsibility on the financial service provider should vary depending on:
(a)  the level of sophistication of the consumer;
(b)  the nature and degree of risk embodied in a financial product or service; and
(c)  the extent of dependence of the consumer on the financial service provider.
(2)  Consumers should take reasonable responsibility for their decisions.
(3)  Any obligation imposed on a financial service provider should be consistent with the benefits expected from such obligation.
(4)  Barriers to competition owing to adverse effects of regulatory actions should be minimized and there should be competitive neutrality in the treatment of financial service providers.
(5)  The need to promote, and not hamper, innovation and access to financial products and services.

(c)  Protections available to consumers
To be able to confidently participate in the financial markets, all consumers should be provided with certain basic protections. In addition, a wider set of protections need to be available only to retail consumers. The Commission suggests six types of protections for all consumers and additional protections for retail consumers as explained below:

(1)  Right to professional diligence
Consumers should be assured that any interaction that they have with a financial service provider will be carried out in good faith and in line with honest market practices. The level of diligence expected from a provider will vary depending on the honest practices followed in that line of business, the consumer’s knowledge and expertise level and the nature of risk involved in the financial service.
(2)  Protection against unfair contract terms
Due to differences in the bargaining power of consumers and financial intermediaries, consumers are often forced to accept unreasonable contractual terms that are not in their best interests. To prevent this, the draft Code declares unfair terms in financial contracts that have not been explicitly negotiated between the parties to be void.
(3)  Protection against unfair conduct
A consumer’s decision on whether or not to enter into a financial contract or the manner in which to exercise any rights under a contract should be taken in a fully informed environment, free of any undue influence. The draft Code therefore protects the consumer from any unfair conduct that is geared towards unfairly influencing the consumer’s transactional decisions. This includes situations where a consumer’s transactional decision is affected by:
(a)  Misleading conduct: Knowingly providing consumers with false information or information that is correct but is provided in a deceptive manner. Any failure to correct an evident and important misapprehension on the part of the consumer will also be covered under the law.
(b)  Abusive conduct: Use of coercion or undue influence to influence a consumer’s transactional decisions.
(4)  Protection of personal information
Any information relating to an identifiable person belongs to that person and should be protected from un-authorised use. Financial service providers will therefore be restrained from collecting, using or disclosing any personal information belonging to consumers, except to the extent required for the purposes of carrying out their business or expressly permitted under the draft Code.
The draft Code also provides safeguards for consumers to be able to access their personal information held by service providers and ensure that the information is accurate and complete.
(5)  Requirement of fair disclosure
Information asymmetry between consumers and financial firms affects the quality of financial decisions made by consumers. This asymmetry needs to be addressed by imposing a positive obligation on financial service providers to provide consumers with all the information that is relevant for them to make informed decisions. This includes disclosures required to be made prior to entering a financial contract and continuing disclosures regarding material changes to previously provided information or the status or performance of a financial product.
Given the wide array of financial services being covered under the draft Code, the regulator may find it useful to specify different disclosure requirements for various financial products and services. With this objective, the draft Code empowers the regulator to make differing provisions regarding the types of information required to be disclosed, the manner in which disclosures must be made and the appropriate time-periods for making required disclosures.
(6)  Redress of complaints
The Commission envisages a two-tier approach for the redress of consumer complaints: first at the level of the financial service provider and subsequently at the level of the redress agency (for retail consumers).
If a consumer is dissatisfied with a financial product or service, the consumer should first take up the issue with the relevant financial service provider. For this purpose, the draft Code requires all financial service providers to have in place an effective mechanism to redress complaints from consumers. They will also be obliged to inform consumers about their right to seek redress and the process to be followed for it. The regulator may supplement these requirements by laying down specific details of the process to be followed by financial service providers to receive and redress complaints.
In certain cases the regulator may also envisage an additional layer of grievance assessment to take place appear, or instead of, the service provider’s own grievance redress mechanism and before the complaint goes to the redress agency. The stock exchange arbitration process would be an example of such an arrangement.

Additional protections for retail consumers

The Commission believes that the following rights and protections should be available to retail consumers over and above the protections available to consumers generally. These protections are needed due to the generally low levels of knowledge and experience of retail consumers.
(1)  Assessment of suitability
Retail consumers may often be in a situation where they are not able to fully appreciate the features or implications of a financial product, even with full disclosure of information to them. This makes a strong case for a thorough suitability assessment of the products being sold to them.
The draft Code provides this protection by requiring that any person who advises a retail consumer in relation to the purchase of a financial product or service must obtain relevant information about the needs and circumstances of the consumer before making a recommendation to the consumer.
(2)  Dealing with conflict of interests
One of the best ways to ensure good consumer protection is to align the incentives of financial service providers with those of consumers and ensure that in case of a conflict, the interests of consumers take precedence. The draft Code incorporates this principle of prioritising the interests of retail consumers over those of the provider. It also requires advisors to inform retail consumers about any conflicted remuneration they stand to receive, which may influence the advice being given to the retail consumer. The regulator may, in addition, specify the nature, type and structure of benefits permitted to be received by an advisor for a particular financial product or service.

d)     Functions and powers of the Regulator

The Commission recommends the creation of a single consumer protection framework which will apply to all parts of the financial system. The consumer protection framework may be implemented by one or more regulators, depending on the views of lawmakers about financial regulatory architecture. While the financial regulatory architecture may change, it is expected that the consumer protection framework would not.

The general functions of a regulator include: making regulations to carry out the purposes of the law; issuing guidance to financial service providers; supervising the conduct of financial service providers to ensure compliance with the law; and taking appropriate enforcement actions to deal with any violations.

The regulator will also be responsible for the existence of financial awareness programmes in order to meet the objective of promoting public awareness in financial matters. This will involve spreading awareness about the benefits of financial planning, protections available to consumers, and features and functions of financial products and services. If required, the regulator may also choose to establish a separate financial awareness body to pursue this function.

In exercise of its supervisory functions, the regulator will need to put in place appropriate arrangements for seeking relevant information from financial service providers, imposing record-keeping requirements, conducting investigations, inspecting premises and holding meetings with the officers of financial service providers. If the regulator has reasonable grounds to suspect a violation of the law, it may initiate appropriate enforcement actions.
e)     Advisory Council on Consumer Protection
In order to monitor and contribute towards the regulator’s consumer protection objectives, the Commission recommends the creation of an advisory council on consumer protection. The advisory council will be responsible for:
(1)  Making representations, in the form of advice, comments or recommendations, on the regulator’s policies and practices;
(2)  Reviewing, monitoring, and reporting to the regulator on the effectiveness of its policies and practices; and
(3)  Creating reports stating its views on all draft regulations published by the regulator. The regulator must take into account any representations or reports received by it from the advisory council and provide a written response in cases where the regulator disagrees with the views or proposals made by the council.

f)      Financial Redress Agency
The Commission recommends the creation of a new statutory body to redress complaints of retail consumers through a process of mediation and adjudication. The redress agency will function as a unified grievance redress system for all financial services. To ensure complete fairness and avoid any conflicts of interest, the redress agency will function independently from the regulators.

The financial redress mechanism proposed by the Commission will replace the existing financial sector-specific ombudsman systems such as the banking ombudsman and the insurance ombudsman although retail consumers will continue to have the option to approach other available forums, such as the consumer courts established under the Consumer Protection Act, 1986 and regular courts. In the future, if the Government is of the view that the redress agency has acquired sufficient scale and expertise to be able to efficiently address all complaints from retail consumers, it will have the power to exclude the applicability of the Consumer Protection Act, 1986 to retail consumers covered by the redress agency.

In any case, once a retail consumer opts for a remedy before the redress agency, it will not be permitted to institute fresh proceedings before another forum, either simultaneously or after a final order has been issued by the redress agency. Similarly, action initiated before any other forum will bar any action before the redress agency. The redress agency will be managed by a board of directors. The agency will be funded through a combination of allocations from the Central Government, standard fees payable by all financial service providers and a complaint-based fee that will be collected as and when a complaint is brought against a financial service provider.

An effective dispute resolution body needs to be designed in a manner that ensures access, convenience, efficiency and speedy remedies. It needs to address two kinds of difficulties: a scenario where a genuine consumer is not able to obtain redress, and one where multiple cases are filed against a financial firm as a strategy of harassment. The Commission envisages the redress agency to function as a technologically modern organisation that will carry out video hearings, digital handling of documents, telephonic/online registration of complaints, maintenance of a high quality electronic database and online tracking of compensation payments. To ensure that the processes designed by the redress agency are in line with these requirements, the draft Code expressly requires the redress agency to put in place adequate systems, processes, technology and infrastructure to enable it to efficiently discharge its functions. The draft Code also empowers the regulators to impose service level requirements on the redress agency with measurable targets on matters such as the total cost to parties for proceedings before it, compliance cost for financial firms and time-periods for each step of the redress process. The redress agency will be accountable for meeting these targets with a requirement to explain any failure to do so. These measures will compel the redress agency to strive towards maximum efficiency in its processes and functioning.

The draft Code allows the redress agency the discretion to open offices anywhere in the country. The Commission intends that the redress agency will use this power to set up Front-end offices throughout the country where retail consumers of all financial products and services will be able to submit their complaints. Modern technology would then be used to connect these front-ends into a centralised mediation and adjudication system.

The redress agency will endeavour to arrive at an amicable settlement in a majority of the complaints through its mediation process. In cases where a settlement is not achieved, the consumer may choose to withdraw the complaint from the redress agency, failing which, it will be referred for adjudication. The adjudicator will hear the parties, examine the claim and pass a final order on the complaint aeter taking into account:
(a)  the provisions of the draft Code on consumer protection and regulations made under it;
(b)  the terms of the financial contract between the parties;
(c)  any code of conduct applicable to the financial service provider; and
(d)  Prior determinations made by the redress agency on similar matters.

An order made by the adjudicator may provide for an award of compensation to the retail consumer, subject to limits that will be specified by the regulators, or issue any other directions that the adjudicator considers just and appropriate. A party that is dissatisfied with the adjudicator’s orders will have the right to bring an appeal before the FSAT and appeals FSAT will lie before the Supreme Court.

The Commission sees strong complementarities in the roles of the redress agency (curing grievances) and the regulators (preventing grievances). The complaints received by the redress agency will shed light on areas where the problems of consumer protection are most prominent, and thus suggest areas for improvement in subordinated legislations. Hence, the draft Code seeks to ensure a feedback loop through which the redress agency will use the FDMC to share information on complaints with the regulators on an ongoing basis and the regulators will analyse the information received from the redress agency and utilise it for improved regulation-making and systemic improvement.

Specifically, the information technology systems within the redress agency must create a high quality database about all aspects of all complaints that are filed with it. This database must be analysed in order to shed light on the areas where there are difficulties and thus feed back into better regulation and supervision. The research program which studies this database should be a joint effort between the redress agency, regulators and academic scholars, with release of datasets and research into the public domain. Over the years, there should be a visible feedback loop where the hot spots of grievance that are identified lead to modifications of regulation and supervision.

Several provisions of the draft Code, specifically those relating to the creation and Operation of the redress agency, require co-ordination and co-operation between multiple regulators. In the event that the regulators are unable to arrive at a consensus on such matters, within a reasonable period, the matter will be addressed through the FSDC[5].
g)     Competition Law and Policy
The Competition Commission of India (CCI) recognises the major role of healthy competition in financial markets for ensuring the best interests of consumers. While perfect competition alone will not protect the interests of consumers, greater competition, in tandem with a sound and well functioning consumer protection framework, is undoubtedly a powerful tool to enhance consumer welfare. The CCI is the leading, non-sectoral authority responsible for competition policy issues in India. The CCI has overlapping jurisdiction with many independent regulators as it is charged with the duty of fostering greater competition in all areas of the economy.
The Commission recommends a structured mechanism for interaction and co-operation between the CCI and financial regulators in the following ways:
(1)  Consultation for draft regulations
The CCI should review draft regulations issued by the regulator for public comments and provide its inputs on the potential competition implications, if any. The regulator must consider the representation made by CCI before finalising the regulations. If the regulator disagrees with CCI’s views, it must provide written reasons.
(2)  Review of regulatory provisions
CCI must be empowered to monitor the effects on competition of any regulatory actions and practices on an ongoing basis. If it determines that a regulatory action is unduly detrimental to competition in a financial market, the CCI must submit a report on the issue to the regulator. The regulator will be obliged to consider and respond to the report.
If the regulator and the CCI disagree on the course of action to be taken, the CCI will have the power to direct the regulator to take specified actions to address the negative effects on competition identified by the CCI
(3)  Reference by CCI
The CCI must make a reference to the regulator if it initiates any proceedings involving a financial service provider, and the regulator must respond with its views on the referred issue, within an agreed period. In such cases, if the regulator believes that an action taken by the CCI may interfere with the regulator’s objectives, the regulator may choose to nominate one non-voting member on to the CCI’s board to participate in proceedings relating to that matter.
(4)  Reference by the regulator
The regulator must report to the CCI about any conduct of financial service providers that appears to it to be in violation the Competition Act, 2002 so that appropriate proceedings may be initiated under that law.
(5)  Memorandum of understanding
The draft Code requires the CCI and the regulator to enter into a memorandum of understanding to establish the procedures for co-operation between them, which may be modified by them from time to time.
There is also a need for organised interaction between the CCI and the resolution corporation in the context of non-voluntary mergers and acquisitions. The mechanisms to address the likely effects of the resolution corporation’s actions on competition in the relevant market is addressed in the draft Code under the part on resolution of financial service providers.


The Global Financial Crisis has significantly curtailed consumer confidence in the financial services sector. It is becoming evident that consumer protection is a core prudential issue, part of the process of creating a fair market infrastructure.  India needs a capable financial system, with sophisticated private financial firms. However, the emergence of this financial system should not become a ‘carte blanche’ for clever financial firms who achieve undue influence with their regulators, to take unfair advantage of customers. The present financial laws in India are vulnerable to such a prospect. Therefore, there is an immenent need to make consumer protection an integral part of legal, regulatory and supervisory frameworks in India.  Regulation may be the principal driver to meet this challenge.


[1] Priest v. Last; (1903) 2 K B 148
[2] Ashington Piggeries Ltd v. Christopher Hill Ltd; (1972) AC 441
[3] Harlingdon & Leinster Enterprises Ltd v. Christopher Hull Fine Art Ltd; (1990) 3 WLR 13; (1990) 1 All 
   ER 737
[4] As per the Explanation given under section 2(d) of the Consumer Protection Act, 1986 “commercial purpose” does not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of self-employment.
[5] Financial Stability and Development Council

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