Buyer beware to seller be responsible
FSLRC paper is the first comprehensive financial sector thought map that gives the consumer his due.
October has begun well. On the first day we had the roadmap for financial sector legislative reform unveiled in the form of an approach paper, and significant life insurance reforms. While the insurance reform is about removing wrinkles in the world as it exists, the first one aims to redefine the world. At least the financial world in India. If finance (finance is more than just money, finance is what money does) is the brain of the economy, then a financial system translates investment into gross domestic product growth. The paper says that there is strong academic literature to show that countries with a better financial system obtain better economic growth. If this is true, then India is attempting to run with both feet tied—some of our financial sector regulation would outdate good vintage wine and the regulatory arbitrage results in overt and covert turf wars that will make kabaddi look like a sophisticated game.
A series of events (another column another time, I promise) induced the then finance minister to set up the Srikrishna commission or the Financial Sector Legislative Reforms Commission (FSLRC) last year that has the mandate to rewrite the financial laws in India to make the 110 trillion economy ready for the next 25-30 years as it doubles itself every 8 to 11 years. After more than a year’s work, the commission has put up an approach paper for public views and feedback—you can access it here: http://www.fslrc.org.in/files/fslrc_approach_paper.pdf.
This column has been arguing for a consumer-centric approach for the longest time and to see this manifest in the FSLRC paper is rewarding. Think about it: a big chunk of the investment needed for India’s growth comes from household savings. It is retail money that has the potential to fuel big ticket investments needed for growth. But as strategies and plans are made to “penetrate” this retail pool of funds, the disaggregated customer’s rights have rarely been thought about as financial sector regulations were written in India. To prevent systemic risk and to prevent company failure have been twin goals of most regulators and consumers have been looked at as the fuel for the fire. Why else would the discussion be around “penetration” of the insurance or mutual fund products? The word itself defines the attitude towards the consumer.
The FSLRC paper is the first comprehensive financial sector thought map that gives the consumer his due. It says: “the first objective of financial regulation is consumer protection,” and then goes on to define how consumers will be protected. Buyer beware—or the disclosure and financial literacy route that the US follows—has been discredited. The sub-prime crisis was a classic case of market failure with commission-driven agents seeking to maximize personal gain at the cost of the consumer who was communicated selective product features and often lied to in the rush to get business. India has seen investors lose more than 1 trillion over the past few years in the unit-linked insurance plan mis-sales. The paper suggests a two-step process for consumer protection that has both prevention and cure. If we know the reasons for bad consumer outcomes (badly structured products, mis-aligned incentives, opacity in costs) why would we first not try and sort that out rather than try to redress a million consumers? The FSLRC proposes a unified consumer protection law that has three parts to it. First, a set of rights for consumers. Some of these would be protection against unfair terms of contract, protection against misleading and deceptive conduct, right to reasonable quality of service, right to data privacy and security. Two, the law will give regulators power to ensure these rights. For example, to ensure that consumers are protected against misleading and deceptive conduct a regulator will be free to frame rules that use a mix of clean product structures, aligned incentives and suitability criterion at the point of sales. Three, a set of principles will guide the powers that ensure consumer rights so that innovation and competition are not killed while focusing only on consumer rights.
The FLSRC approach to cure sees the creation of a unified Financial Redressal Agency (FRA) with front-ends in each district for consumers to complain to. FRA will be unified across products and services—the situation of a banking regulator telling a buyer of life insurance that his story of being mis-sold through the banking channel is not his problem but that of the insurance regulator will be difficult under this set up. The paper wraps up the discussion on consumer protection with this: “India needs a capable financial system, with sophisticated private financial firms. However, the emergence of this financial system should not become a carte blanche for clever financial firms who achieve undue influence with their regulators, to take unfair advantage of consumers… It is essential to place the function of consumer protection at the heart of financial regulation.” Hear! Hear!
(I have used the report heavily in the column, used exact lines, words and passages, so quick-gun plagiarism finger-pointers, don’t even think about it.)
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com
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First Published:2 Oct 2012, 07:12 PM IST
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