Home / Opinion / Consumer protection draft will need a DNA change in Irda

The impact of the Financial Sector Legislative Reforms Commission (FSLRC) report is already visible in the rush by regulators to put in place consumer protection measures. The Reserve Bank of India’s Charter of Customer Rights (http://goo.gl/ISKD68) was released on 3 December 2014, and the Insurance Regualtory and Development Authority of India’s draft Protection of Policyholders’ Interests (PPI) on 26 December. Comments on the latter will be accepted till 19 January at http://goo.gl/dVOIGL.

The fact that it has taken a government push for financial sector regulators to turn their gaze towards a basic issue such as consumer rights tells you how much your financial wellbeing matters to them.

The PPI draft of Irda of India says all the right things and dutifully cut-pastes Part IV of the draft Indian Financial Code that was drafted by the FSLRC. Unfortunately, this serves little purpose. The Authority should understand that the IFC is the primary law and lays down a principle-based goal set. It is for the individual regulators to formulate micro prudential regulations; or, in other words, write regulations that are prescriptive. Simply copying Part IV doesn’t do it.

There are other issues with the PPI. It says all the right things but unless the way that Irda of India thinks about consumers and the need for their protection changes, these will have little impact. For example, the Right to Protection against Unfair Contract Terms (in Annex IV Enforcement of rights of consumers) gives consumers the right against unfair contract terms that are present but have not been approved of by Irda of India. But the Authority approves products, brochures and ads of insurance companies. The possibility of a term or phrase creeping into these documents without its approval is slim.

The insurance chiefs I checked with agree. They stay away from inserting a word that has not been approved by Irda of India. Then what exactly does this right mean? Should policyholders not have the right to contest Authority-approved terms as well? Are we assuming Irda of India’s divine right to understand what is ‘fair’ and ‘unfair’?

The seven rights of consumers, such as the right to protection against unfair market conduct, the right to requirement of fair disclosure and to suitability, are all in the right direction but will mean nothing on the ground because of the way the insurance regulator deeply thinks about itself and its role. Other than a brief period under the previous regulator at the end of his tenure, Irda of India’s world view is this: policyholders are done a favour by being sold policies. They inherently lie and mislead sellers of insurance. Agents need protection and companies’ profits need to grow. Not exactly consumer-friendly.

The PPI regulations will fail to give consumers any significant protection because of the way the game is set up. They are verbally sold the product—it is described in a manner that makes you think that pigs can fly, the policy document arrives after the cheque has been cashed and these are not the easiest papers to read through. By now the customer has spent many days in completing the health check-up and other formalities of the product and by the time the policy document arrives there is a large amount of sunk cost in terms of time, effort and money. The obtuseness of the document is a further disincentive to read. The trusted friendly agent keeps telling the customer that all is well. Once the signature is done, the customer has signed a contract and is assumed to have agreed to all provisions. Most consumers who complain get this answer: but you signed. The role of the verbal sales push is totally ignored. I don’t see how anything in the industry will change till there is a process to document verbal advice.

Additionally, unless the costs and benefits of a policy are clearly marked out in the brochures and in the sales process, these rights will have no meaning. Did you know that the insurance regulator approves products that mention returns on an investment in terms of returns pegged to a number that is not your investment? A policy brochure will say 11% return in bold text. Small print will have ‘on sum assured’. You think 11% returns. But your return is 2%, or 4% if you’re lucky. Why the internal rate of return of a product cannot be disclosed to the customer can only be with the intention to cheat. And if Irda of India is clearing these plans, the needle points to it favouring the companies and not the policy holders. Unless this changes, consumer rights as they are drafted have no meaning.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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