Protecting consumers, the heart of finance

Relevance: Consumer protection and education in financial sector.

Synopsis: Competitive markets in financial services are the best bulwark against consumer fraud in the long run. In the medium term, dedicated legislation could be the answer

Context

In the recent Budget, several initiatives were announced to develop and deepen the country’s financial markets. For instance, the announcement of a unified securities market code, an investor charter to assimilate the rights of investors across all financial services.

Issues with consumer protection in India

• Very little is being done to protect and educate consumers from financial frauds. Very minimal actions have been taken in this regard. For instance, a year ago, a National Strategy for Financial Education (2020-2025) prepared by the financial sector regulators was released by the Reserve Bank of India (RBI). This strategy document thinks deeply about consumer protection and education.
• Also, India has only few legislations for governing consumer protection for financial services. For instance, the Consumer Protection Act, 2019 (COPA). Moreover, it is fundamentally oriented towards consumers of non-financial goods and services. This has resulted in the various forms of consumer abuse in Indian finance.
• The present financial laws do not establish a precise legal framework for consumer protection in finance.
• The working of the existing regulators on quasi-legislative and quasi-executive functions has shortcomings, which feeds through into their work on consumer protection also.
• Invisible infrastructure on problems such as privacy is lacking. A consumer-friendly redress mechanism is lacking.
• Finally, the present inter-connected systems of financial repression and debt management generate financing for public debt in ways that are unfair to the users of formal finance in India.

FSLRC’s contribution

The creation of the Financial Sector Legislative Reforms Commission (FSLRC) was announced in the 2010 budget. It explicitly mandated an examination of issues of data privacy and protection of consumer financial services in the Indian context.

• The FSLRC drafted the “Indian Financial Code version 1.1” that provided a strategy for consumer protection through prevention and cure. The prevention is done by solving the problems of financial regulatory architecture, the working of regulators, and setting a clear set of principles defining consumer protection.
• Further, it proposed a unified and independent Financial Redress Agency (FRA)  a one-stop forum for complaint settlement for all financial consumers. This does away with the multiplicity of redress forums (internal forum of the FSP, sectoral ombudsman, consumer dispute redressal forums, civil courts) and allied costs.

The work of FSLRC ended in 2015. In many respects, when we look at the various forms of consumer abuse in Indian finance, then we can see that the institutional reforms proposed by the FSLRC would have delivered better outcomes.

Way forward

A deep and liquid market is the best protection for ordinary consumers, better than the protection of interventionist regulators. Too often in India, we are interested towards a more socialistic and centrally-planned system, in the name of protecting consumers.

But this reduces gross domestic product growth and increases poverty, this is the greatest form of consumer abuse.

Conclusion

Our biggest task in consumer protection should be to break away from the system of regulators.