The last five years have probably seen more being done on customer protection in financial services than anytime previously.
In 2009-10, the Securities and Exchange Board of India (Sebi) commenced a series of measures that have increased transparency in mutual funds and curbed mis-selling. At about the same time, the Insurance Regulatory and Development Authority (Irda) renewed its focus on product design that has culminated in a wholesale revamp of insurance products with exactly the same intent. The Reserve Bank of India (RBI) has stepped in to cap lending rates in the microfinance sector and abolished the pre-payment penalty on home loans. More recently, an RBI panel on comprehensive financial services for small business and low-income households recommended a shift towards emphasis on suitability of the products for the customers. The pension regulator, Pension Fund Regulatory and Development Authority (PFRDA), has recently invited public feedback on a host of regulations it plans to revise in 2014.
All in all, the financial sector regulators are moving towards an ecosystem which puts the onus on “seller aware” rather than the traditional and convenient wisdom of “buyer beware”. This shifts the responsibility on the sellers to ensure that the products are sold to target customers based on the principle of suitability and that this is done in a fair manner.
In this context, one fundamental challenge is to be able to plug any possible regulatory arbitrage for businesses to gravitate where oversight is relatively benign or to engage in practices that fall in possible blind spots between the regulatory boundaries. The multi-crore ponzi scam by Saradha Group in West Bengal is one such recent example, albeit of an extreme kind. More mundane practices of such kind are perhaps flying under the radar.
For the majority, who wish to conduct business ethically, it can also be distracting and inefficient to juggle regulatory and compliance variations of different regulators. Take for instance, mutual funds being required to set up separate companies for fund management under the National Pension Scheme while they run many similar schemes perfectly well as asset management companies.
For the consumer, it is sub-optimal to have suitable products coming from one part of retail finance and not so suitable ones from another. It makes no sense to have differential approaches to fees and charges and transparency levels based on regulatory capabilities of individual regulators. The fact that many more people have investment products from insurance companies rather than mutual funds should have no co-relation to the approach towards fees and charges and disclosure norms by the respective regulators.
Similarly, the quality of dispute and grievance redressal should not depend upon how effective a particular regulator is. To illustrate, in early years of the last decade, many of Sebi’s orders did not measure up to Securities Appellate Tribunal’s (SAT’s) scrutiny. This effectively made the market regulator get its act together and put together sensible investigation and legal teams in place. Therefore, an effective oversight over regulators is an essential ingredient of an effective regulatory framework and it cannot leave out some regulators from its ambit.
The customer thinks, or should think, in terms of life cycle goals where he is looking for solutions across credit, savings, investments and insurance. A majority of Indian customers have low access to regulated financial services and have low financial literacy. A cocktail of regulatory systems simply prohibit customer protection and inhibit design of the best possible products.
Another broad theme that the financial regulators have been pushing over the last decade has been financial inclusion. Irda has been trying to push microinsurance. Sebi is trying to take mutual funds beyond the top cities. RBI is trying to ensure everyone has a bank account and PFRDA is motivating poor workers who may not even have a bank account to open a pension account. However, it would make sense and be cheaper to offer a bank account, pension and insurance together to this target population. This wisdom is not lost on the regulators but with their limited turf they are basically left to come up with disjointed efforts towards financial inclusion.
Therefore, the finance minister’s budget announcement to dust off the Financial Sector Legislative Reform Commission (FSLRC) report that was submitted in March last year is a big step forward for India’s financial sector reforms. A tight financial services regulatory framework would have a real chance to expand our financial markets, implement an effective client protection framework and a credible financial inclusion road map.
The journey to a unified financial regulator as envisaged by the FSLRC could perhaps be made less challenging by making it a two-step process due to the plethora of regulators i.e. RBI, Sebi, Irda, PFRDA and FMC (Forward Markets Commission). The unified framework would become effective if SAT is quickly upgraded into one common Financial Services Appellate Tribunal (FSAT) for all regulators other than RBI to start with. In step two, the FSAT should have oversight over RBI also. This approach could result in tangible outcomes sooner than later.
It will be interesting to watch how the finance minister progresses on this in the coming months.
Ashish Aggarwal is co-founder and executive director at Invest India Micro Pension Services.
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