We are not surprised when cars, dishwashers or other consumer goods are recalled due to a manufacturing flaw. Decades of work by activists and consumer product regulators have set standards of product quality, and there are road rules for those who break the standards.
More recent products in the market, like online social networking accounts that are “free” but have a cost in terms of privacy and identity theft, have also got into the mould of not ignoring consumer issues. Recently, the top executives of Sony lined up to bow their apology to consumers for the PlayStation data breach and offer a year’s free service with an identity protection firm.
Apologies, compensation and product recall in customer-facing financial products, however, remain more the exception than the norm. Which is why global eyebrows were raised when four multinational banks in the UK agreed to pay a total of £9 billion (Rs 65,700 crore) to their customers who might have been mis-sold an insurance product called the Payment Protection Insurance (PPI).
The nature of a financial product makes regulatory scrutiny difficult. The US took the disclosure and transparency route that showed its warts in the subprime crisis. The new road looks at extending the lessons of consumer products to financial ones—that product construction should be such that they do not harm those who buy. The UK regulator, the Financial Services Authority (FSA), after grappling with different ways of regulating an invisible product whose moment of truth is sometime in the future, has made it the responsibility of the firm manufacturing and selling the product that customers have positive outcomes. It is in continuation of this thought that the product recall of PPI was announced and the direction given to compensate those hurt by the mis-sold product.
As India gets ready to deal with the issue of regulating financial advice under the aegis of the Financial Stability and Development Council (FSDC), we may want to look at the road taken by FSA and examine the behavioural-finance-nudged ideas being incubated in the US by the Consumer Protection Finance Bureau. Another thought for FSDC is to try and answer the question: how do we incentivize product manufacturers and sellers such that they have the long-term financial well-being of their customers in mind at all times? If money is the trail, then is there a way to use it to get economic agents to do the right thing?
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