Consumer protection was at the centre of discussion at the annual Financial Planning Congress 2012-13 organized by the Financial Planning Standards Board (FPSB) India in Mumbai on 16 January. In partnership with Mint, the day-long congress explored the different aspects of consumer protection.
Chief guest U.K. Sinha, chairman, Securities and Exchange Board of India (Sebi), spoke about the importance of transparency, which he said would lead to consumer protection. Said Sinha: “Sebi is trying to find out ways so that there is more transparency as far as information flow is concerned.”
Consumer protection is becoming the core agenda even for financial regulators in developed nations. Said Peter Haas, consul general, embassy of the US, special invitee at the event: “In the US, a big part of reforms that are happening under the Obama administration is the creation of the Consumer Financial Protection Bureau, which is focused on protecting consumers and empowering them to make wise financial decisions.”
Coordination among regulators
In the first session of the financial planning congress, the focus was on financial reforms. There was consensus among panellists on the fact that financial products have more regulations compared with physical assets. At present, different financial products get governed by different regulators, including the Reserve Bank of India and Sebi to the Pension Fund Regulatory and Development Authority (PFRDA) and Insurance Regulatory and Development Authority (Irda).
Said Nilesh Shah, president (corporate banking), Axis Bank Ltd, “Though the intentions of the regulators may be good, they end up creating hurdles in the form of constant changes in the know-your-client (KYC) document norms and other kind of documentation creating a mental block among investors, causing them to stay away from the financial market.” Shah was referring to the changes in KYC process that has undergone for four times in the last five years. The panellists agreed that though ideally there should be a single regulator, not just for financial products, but also for real assets such as gold and real estate, it looked difficult to happen in the near future.
Looking for a solution, Shailesh V. Haribhakti, chairman, BDO Consulting Pvt. Ltd, said: “To get a single regulator is a long distance idea. It might happen over 10-15 years. In the meantime, we can rather ask for regulators to act in consent.”
The second session focused on aiding business progression through consumer empowerment. The panellists agreed that consumer empowerment through trust is the core of any financial services business. Said Suresh Mahalingam, managing director, Tata AIA Life Insurance Co. Ltd, “Indian investors are staying away from the financial market. Till the customer trusts a financial product he will not invest in it.” Foreign institutional investors (FIIs) are pouring their money into India, but domestic investors are shying away from the financial market, he said.
Speaking on ideas that will make Indian investors mobilize their money into equities, Rajiv Deep Bajaj, vice-chairman and managing director, Bajaj Capital Ltd, said: “To bring investors into the financial market, all stakeholders, including the regulator, manufacturer and adviser of financial products, should work towards building confidence in the investor.”
But Mahalingam of Tata AIA Life Insurance blamed this fall in equity investment on financial advisers. He said: “We have good financial products but investors are not buying because financial advisers are not able to communicate to the consumer. It is the inability to explain the financial product which is actually dithering the consumer from buying financial products.”
The panellists concluded the session by saying that the duty of empowering the consumer was not just on the financial planner but also on the manufacturer, distributor and regulator.
Consumer power and business growth
Consumer protection is a very important factor, but does it come at the cost of doing good business? With this theme, panellists discussed the need to seek balance between consumer protection and business in the third session.
C. Jayaram, joint managing director, Kotak Mahindra Bank Ltd, said he believed that “consumer protection and trust is the core of financial services business. Unless he (the consumer) is not protected the business can’t grow. Businesses that have their core motive as valuations will not last long”.
Agreed Joydeep Roy, CEO and whole-time director, L&T General Insurance Co. Ltd, “Only when consumers feel completely protected will they come to you. Also consumer protection is too big an issue to be left only to the regulators. After all the biggest beneficiary of the customer are manufacturer and the distributor. Hence, it is the responsibility of the industry and a company’s top management to protect consumers.”
All the panellists favoured consumer protection in terms of its importance in growing business. They all claimed that long-term consumer relationship is what keeps businesses growing.
Here are edited excerpts of what each panellist had to say during the congress.
U.K. Sinha, chairman, Sebi: When information is not disseminated real time and given very reluctantly after a delay, the quality of information gets affected. Hence, it is important to avoid information asymmetry.
In the past, Sebi has taken steps such as ensuring minimum assured allocation to retail investors and complete disclosure of voting results of top 500 companies listed on BSE Ltd within 48 hours on the website. In case of mutual funds, for instance, making it mandatory for a fund house to disclose its fund manager’s performance is another step in this direction.
We are coming out with a distributor regulation where the asset management company has to disclose the percentage of its assets that are distributed by its associate companies.
Shailesh V. Haribhakti, chairman, BDO Consulting Pvt. Ltd: If we look at the structure of our accumulated savings, the number one position goes to gold. If you add the official and unofficial combined quantum of money that India has put in gold, it will come close to $2.6 trillion, higher than our gross domestic product. However, financial products such as bank deposits hold around $1.2 trillion and insurance has just one-fourth of bank deposits, whereas, AMCs have one-tenth of bank deposits.
We need to have an extraordinary protective legislature and great amount of education to encourage people to invest in financial instruments which can be done only through financial inclusion. By inclusiveness, I mean that investors should get the best shot at the most productive and profitable investment in a safe and convenient way. Besides this, encouraging e-governance infrastructure and dematerializing gold and insurance policies will encourage retail investors to enter the financial market.
Nilesh Shah, president (corporate banking), Axis Bank Ltd: In the process of preventing crime in the financial market, the regulator is creating hurdles due to which investors are getting alienated from the market. Besides, when it comes to equity investment, everybody tries to time the market rather than spend time in the market.
Indian retail investors have been hit time and again so hard that they have stopped buying financial products. The hit is from the regulator, distributor and manufacturer of products.
One way to move ahead is to either allow provident funds to compulsorily invest in equities and show that experience to investors or make New Pension System more attractive for distributors. This way eventually you will be able to convince investors that if they use discipline, they will not lose money.
C. Jayaram joint managing director, Kotak Mahindra Bank Ltd: Financial services particularly are a business of trust. Customers with whom you are dealing need to feel adequately protected. There are challenges for business as most companies focus on short-term gains rather than long term. In the short term, there is pressure on revenues. This leads to a bunch of practices which includes incentivizing sales people causing them to sell products to consumers even when they don’t need it. These are only temporary fixes and over a long term no business can sustain on the short-term profit model. Then you will have the regulator who will crack the whip whenever a business model departs from consumer protection.
Sundeep Sikka, president and CEO, Reliance Capital Asset Management Ltd: It is a moment of crisis today because domestic investors are not looking at equities. Today FIIs are investing in the Indian market, while domestic investors are going after gold. Right now money is not coming into the capital market. I believe the regulator has done what it had to do. Now it is time for us as the industry and the stakeholders to get the confidence back.
The biggest issue is that we are lacking in confidence and are not able to communicate the benefits of the capital market to the investors. Though we had problems earlier, today there is nothing structurally wrong with the industry and financial products. It is time for us to get confidence back and each one of us, including distributor, manufacturer and regulator, need to play that role.
Suresh Mahalingam, managing director, Tata AIA Life Insurance Co. Ltd: It is sad that retail investors are not coming into unit-linked insurance plans (Ulips) in a big way. Contrary to the negatives that people talk about Ulips, I think there is a lot of positive about Ulips. The problem is more in terms of communication of the benefit of Ulips. Currently, the markets are looking good. However, customers are not coming in despite the products looking attractive from a customer’s perspective.
The larger issue is how well the financial advisor communicates to the consumer. Today the financial advisor is shying away from communicating about the product because we have historically had some adverse issues as far as Ulips are concerned. He is not technically equipped to answer the customer whose fund value is probably lesser than the premium that he has paid. Here, the financial advisor is not able to communicate that fund value must be seen net of charges that have been put in place and that the investment is for a long-term horizon.
All stakeholders including the regulator are responsible to help professionalize the intermediaries in a manner that they can make the customers understand.
D. Swarup, chairman, FPSB India, and member convenor, Financial Sector Legislative Reforms Commission: The government had constituted the financial sector legislature reforms commission nearly two years ago. The mandate of the commission is to review and rewrite the financial sector laws. The commission is of the firm view that the final purpose of all financial legislation is to promote the welfare of consumer of the financial product.
With this as the central objective in mind, the commission in its approach paper has proposed the adoption of a consolidated non-sectorial consumer protection law for the entire financial system. This law will approach the problems of consumer protection on two fronts: prevention and cure. The aspect of prevention includes transparency, disclosures, resolving conflicts of interest, financial education and literacy. This will be the responsibility of the financial sector regulators as it is now.
The more important aspect, the curative part of it will be taken care of by a unified financial redressal agency, which will have front ends all over the country. Modern technology will be used to connect these front ends to a centralized light weight dispute resolution process. The consumer will deal with FRA when they have grievances in financial activities.
Ranjeet S. Mudholkar, vice-chairman and CEO, FPSB India: The reforms in the financial sector are a broad domain addressing the financial regulatory architecture. However, at the very core of this evolved exercise is consumer protection and empowerment with other strings only collaborating to reinforcing this drive. We visualise the financial discipline exercised by informed and empowered financial consumers to transform India into a capable financial system.
FPSB India has always embraced the efforts towards empowering customers. There is no way an adviser can go wrong if he has the client’s interest at the centre. The financial institution, financial services organization and intermediaries all create, by their ethical conduct, an enabling framework for financial sector reforms to take place without infringing on their rights and power.