CONSUMER
ACTIVISM IN AN ERA OF GLOBALISATION – FSLRC AIMS AT MORE INTRUSIVE APPROACH IN
INDIA TO PROTECT THE FINANCIAL CONSUMERS – A CRITIQUE
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
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
, 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
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.
IV. CONSUMER PROTECTION - GLOBAL SCENARIO
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.
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.
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.
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.
A minister of the federal cabinet
is responsible for consumer rights and protection.
V. CONSUMER PROTECTION - INDIAN SCENARIO
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.
VI. FSLRC APPROACH TO CONSUMER PROTECTION
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;
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:
(2) Micro-prudential
regulation
(6) Development
and redistribution
(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.
(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.
(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.
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.
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
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.
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