Why regulators must take a coordinated approach to protect financial consumers

Source– The post is based on the article “Why regulators must take a coordinated approach to protect financial consumers” published in The Indian Express on 19th November 2022.

Syllabus: GS3- Mobilisation of resources

Relevance: Financial services

News- The article explains the G20/OECD draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection.

What has been proposed by G20/OECD released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection (FCP)?

The 2011 principles covered 10 thematic areas reflecting the market and consumer issues, including equitable and fair consumer treatment, disclosures and transparency, and financial education.

In 2022, two additional principles were included, that are access and inclusion and quality financial products.

The updated principles also recommend intervention by regulators in certain high risk products, cultivating appropriate firm culture and using behavioural insights to better consumer outcomes.

These principles deal with three cross-cutting themes — financial well-being, digitalisation and sustainable finance.

What should be the consideration of FCP policies?

Financial well-being– FCP policies must contribute to overall financial well-being and resilience of consumers.

An effective FCP regime should provide information to consumers that is adequate and understandable. However, merely providing information for compliance is not enough, especially in India where financial literacy is low.

Digitalisation– FCP must factor in the increasing number of digital channels used by consumers to interact with financial products and services. The impact of greater use of artificial intelligence and other emerging technologies also needed to be considered.

Additionally, concerns regarding redress of grievances against payment service providers in the UPI ecosystem should be taken care of.

Sustainable finance– There is growing consumer demand for sustainable financial investments. Financial services providers are incorporating environmental, social and governance factors into their operations, products and services.

FCP recommends improved transparency to help consumers make informed choices.

Avoid greenwashing– The 2022 draft also warns against “greenwashing”. Financial regulators must monitor that corporations are not misleading consumers with false claims regarding progress towards climate targets.

What steps are taken by India regulators in this regard?

SEBI prescribes certain financial service providers to assess customer suitability and undertake risk profiling before providing services.

The RBI has  released guidelines on digital lending. It has mandated entities providing digital lending services to have a grievance redress officer, assess a borrower’s creditworthiness before extending credit and allow a borrower to exit without penalty.

SEBI has transitioned from “business responsibility reporting” to “business responsibility and sustainability reporting”. The purpose is to  promote responsible corporate governance for climate change. Eligible companies under BRSR must provide environmental sustainability related disclosures, including a sustainability performance report.