Dhirendra Swarup: Protecting the consumer

Implementing Financial Redress Agency would be an important step in reorienting regulation

The government is considering a proposal to set up an independent Financial Redress Agency (FRA). This agency would provide retail financial consumers with a one-stop forum for speedy and convenient settlement to complaints. In this article, I highlight the flaws in the current consumer protection regime and the features of FRA designed to overcome them.
 
Consumer protection has two aspects — prevention and cure. Prevention requires regulators to obtain fair play by financial firms. Cure calls for effective complaint handling. The current regime is lacking on both these counts. Gaps in prevention have resulted in banks and other distributors trying to push expensive products and poorly designed products. Gaps in cure are visible in the over-burdened consumer courts that lack human and other resources to deal with financial products. A plethora of sectoral forums such as SEBI, RBI, the banking ombudsman, the insurance ombudsman, IRDAI, and PFRDA suffer from several challenges.
 
First, consumers are given the runaround due to the many locations through which the redress forums operate. They have to identify the right channel and bear the related costs. Second, consumers have to deal with the lack of uniformity in approach, processes, capacity and powers. SEBI is not empowered to award compensation and PFRDA’s system is similar to SEBI's. However, last month it appointed a part-time ombudsman. The approaches of banking and insurance ombudsmen vary. The banking ombudsman awarded compensation in 18 cases in 2015-16, out of over one lakh complaints. In contrast, the insurance ombudsman awarded compensation in nearly 25 percent of the 30,000 cases.
 
Third, there is a lack of uniformity in legal frameworks and regulatory supervisory capacity across sectoral forums. This incentivises firms to push expensive and opaque products where they spot regulatory gaps or sub-optimal redress mechanisms.
 

In 2015, Finance Minister Arun Jaitley, in his budget speech, began the groundwork for Financial Redress Agency by setting up a task force

Fourth, with markets converging, an unhappy consumer may struggle to identify the offending party and the relevant redress forum. Most intermediaries sell multiple products cutting across sectors. Going forward, this trend would only increase.
 
Fifth, regulators today may deny or delay admitting to systemic problems. A redress forum with weak independence or where the formal feedback loop with the regulatory function is fragile allows for this possibility. The mis-selling in ULIP products may have flourished for an extended period owing to this reason. Moreover, levying fines on firms and awarding compensation to consumers is populist and can mask deeper failures. Fear of regulators may force firms to comply even when they believe they are not in the wrong. Due to these challenges, consumers suffer poor outcomes or avoid the formal financial system. This is expensive and bad for the economy and should no longer be ignored.
 
First-time consumers account for 260 million bank accounts, 130 million insurance policies and 8 million pension accounts. Promotion of cashless payments has brought millions of new consumers to financial payment providers. Many of these consumers have limited resources, low literacy and even lower financial literacy. Therefore, there is an urgent need to build the financial regulatory machinery that will protect consumers better.
 
In 2009, the Raghuram Rajan committee on financial sector reforms recommended that regulators work through a collective process to protect consumers. In the same year, the committee on investor awareness and protection documented the widespread mis-selling faced by the retail consumers and argued for common minimum regulatory standards for advisers. In 2013, the Financial Sector Legislative Reforms Commission, chaired by Justice B N Srikrishna, conceptualised FRA. The accompanying draft Indian Financial Code, a model financial sector draft law, placed consumer protection at its heart. In 2015, Finance Minister Arun Jaitley, in his budget speech, began the groundwork for FRA by setting up a task force.
 
The task force has, on the preventive side, recommended that a new financial consumer protection and redress law be enacted. This would provide consumers with certain basic protections such as requiring the financial firms to act with professional diligence and to redress complaints. It would provide for the protection of consumers against unfair terms and unfair conduct. It would require protection of personal information and fair disclosure by the firms. This would help reduce complaints from arising.
 
On the cure side, the recommendations focus on four attributes for FRA. First, all retail consumers would approach this unified agency, irrespective of the financial products involved. Consumers' access would be in a user-friendly manner in multiple languages through letters, telephone, missed call service, email, mobile apps, text messages, and video. In addition, local facilitation centres would handhold the consumers.
 
Second, FRA’s processes, quality, capacity and use of technology would be optimised to deliver timely redress. There would be a fast-track mechanism for simple complaints. In each case, FRA would first ask the financial firm to offer a solution. Then, FRA would form a preliminary view and discuss this with the consumer. The complaint would be resolved if a consumer is satisfied at this stage, or through mediation on conference calls. Where mediation does not work, FRA would make a decision based on facts. Third, FRA would have no incentive to cover up problems, as it would be independent. Instead, it would give feedback to regulators to help improve regulations and supervision.
 
Fourth, FRA’s accountability would be ensured through disclosure requirements and performance reviews. It would have an Independent Assessment Office to consider complaints against its standard of service. In addition, orders by FRA would be appealable at the Securities Appellate Tribunal.
 
The Ministry of Finance has set up many financial agencies. These include SEBI, IRDAI, PFRDA, SAT, FIU, etc. In my knowledge, most of these projects had suffered from a lack of adequate preparatory work with the consequential delay in implementation. The project planning for FRA has avoided these pitfalls and provides a comprehensive blueprint for establishing this agency.
 
Consumer protection is the reason why we do financial regulation. The existing financial regulatory system requires major reforms in order to reorient it towards the objective of consumer protection. This will be a long journey. Implementing the FRA task force report would be an important step in that journey.

The writer was formerly Secretary (Expenditure & Budget), Ministry of Finance and Chairman, FRA task force