Financial Consumer Protection-Existing and Proposed as per FUSEL- Pranks Single, NIB, DES Abstract Financial consumer protection is one thing that everybody is vouching for. The laws pertaining to financial consumer protection were made in sass. So the time has come to pay a some attention to the old laws and modify them taking into account the problems and grievances of financial consumers of today’s era. This paper is an analysis of existing financial consumer protection and the proposed structure for consumer protection as per FUSEL. 1.
Introduction Forgery, cheating, misrepresentation by the intermediaries; False promise of loan, ensign, free gifts like gold coins; Free look cancellation, Changes in policy terms and conditions, changes in conditions involved in Joint account handling, internet banking related misuse/abuse, ATM related service deficiencies, loss of credit/debit cards and extent of card holders” liability in such an event, these are some of the problems that a consumer faces while dealing with the financial, basically banking or insurance sector of the economy.
Apart from this, there are other problems faced by a lot of investors in mutual funds and stock market; the securities scam of 1992 and 2001 as not yet faded (commonly referred to as Harsher Meta & Ketene Parker scam). The instances of general public losing money to chit funds, NBS, Indri companies etc are occurring even today, recent example being Shards companies financial fiasco. These instances have eroded customer confidence to such an extent that it will take a lot of effort from the regulator’s side to fully repose the confidence back.
This is true in global context also where the greed for huge gains drove financial engineers to innovate and sell complex financial products to unsophisticated investors. All these problems are hinting towards one thing- Financial consumer protection”. To ensure that financial consumer protection is in place we first need to look into two important aspects-“Financial inclusion and financial literacy. From the perspective of policy makers, including the Reserve Bank of India and other financial regulators, financial literacy, financial inclusion and consumer protection is a must to gauge the needs of the population and financial institutions, so that financial resources can be translated into higher economic growth while minimizing the financial stability risks. For any kind of stability, whether uncial, economic, political or social, inclusive growth is an essential prerequisite. Inclusive growth, in turn, is largely driven by financial inclusion and an inclusive financial system.
An inclusive financial system will not only include inclusion in the banking system but inclusion in insurance sector, securities market and pension funds as well. While the goal of providing effective customer service has been long recognized, we cannot say that objective has been successfully met. Global financial crisis gives the proof of inability of banks to understand their customers and their requirements and not rendering services properly. Prior to the crisis, consumer protection was viewed through a narrow prism of safety and soundness of the financial entities.
If the financial institutions could remain solvent, consumer protection could be ensured. This only retracted a very constricted view to what constitutes consumer protection and how the financial market players should conduct themselves. 2. Internal Grievance Redressed Mechanism Internal grievance redressed machineries in the institutions take care of the consumer protection at the level of financial service provider and it also helps to reduce the burden of complaints at the ombudsman level.
Here we will discuss grievance redressed machinery at various financial service providers. Banking sector Insurance Sector Insurance companies have a well established system of receiving, registering and disposing of grievances in each of their offices through Integrated Complaint Management System (ISMS). The system has been integrated with the system of ERDA (ISMS). ISMS is a comprehensive solution which not only has the ability to provide a centralized and online access to policyholder but complete access and control to ERDA for monitoring market issues.
Apart from these sectors the banks which are not overfed under Banking Ombudsman Scheme have to follow the same structural provisions as mentioned in ombudsman schemes though there is not any regulatory authority involved like ombudsman scheme. (E. G. Rural Cooperative banks, NBS etc. ) NBS did not have any provision regarding internal grievance redressed machinery but the rising consumer complaints to DNS, RIB have forced them to issue Guidelines on Grievance Redressed Mechanism on February 18, 2013 and to incorporate them into Fair Practices Code for NBS.
Securities Sector Market regulator SIB had issued guidelines for all listed firms to register themselves tit its online complaint redressed system, SIB Complaints Redress System (SCORES), after which the companies would be required to resolve all grievances within 30 days of their receipt. 3. Alternate Grievance Redressed Machinery The alternate grievance redressed includes all the ombudsman schemes currently operating in the financial sector.
As already mentioned, if the person is not satisfied with the response received from the internal grievance redressed machinery, the complainant can approach the alternate grievance redressed mechanism which is as follows * Banking Ombudsman Scheme- for banking sector Insurance Ombudsman – for insurance sector * Securities ombudsman- for the securities market The banks which are not covered under banking ombudsman scheme will come under the purview of different departments of RIB * Rural cooperative banks- RPC (Rural Planning and Credit Department) * Urban cooperative Banks- JIBE (Urban Banks Department) * NBS- DNS ( Department of Non-Banking Supervision) Critical Appraisal of the ombudsman schemes * Banking Ombudsman scheme is the best in the terms of structural provision as it the ombudsman will be appointed by regulator. A scheme that is governed by coagulator appointed person is beneficial as it helps in avoiding conflicts of interest between consumer and service provider.
Also, the person is appointed trot the organization so he will be well qualified in dealing with complaints pertaining to his own field * In insurance sector, ombudsman is selected from outside the purview of the organization, (either a district Judge or a high court Judge) which leads to lower efficiency in complaints disposal. The person from the law field will be interested in dealing with the situations in the manner as Judicial proceedings are handled so it lays the process of disposal of complaints. Sometimes it also leads to ill informed decision in the sector as the person appointed is from outside the field of insurance. * Sable’s scheme does not seem to be operational though website of SIB clearly states that ombudsman scheme is very much in existence and going to take off. 4.
Legal Framework for Consumer Protection Apart from these three schemes, there is also Consumer Protection Act 1986 which covers the entire purview of the protection provided to consumers in financial as well as non financial sectors. The Consumer Protection Act of 1986 was enacted with an objective to provide better protection of the interests of the consumers, to make provision for the establishment of Consumer Councils and other authorities for the settlement of consumer disputes. This is indeed a very unique and highly progressive piece of Social Welfare Legislation. While other schemes mentioned above Just provide awards pertaining to limited grounds, the provisions of this Act are intended to provide effective and efficient safeguards to the consumers against various types of exploitations and unfair dealings.
Unlike other laws, which are classically punitive or preventive in nature, the provisions of the Act are compensatory. It is a matter of great satisfaction that we can legitimately boast that we have in our country a statute, which has been in operation for more than 25 years, which provides more effective protection to the consumers than any corresponding legislation in force in countries, which are considered to be much more advanced and industrialized. 5. FUSEL Recommendation and Consumer protection in Indian Financial Code The Financial Sector Legislative Reforms Commission was constituted by the Government of India, Ministry of Finance, in March, 2011.
The setting up of the Commission was the result of a felt need that the legal and institutional structures of the financial sector in India need to be reviewed and recast in tune with the contemporary requirements of the sector. The institutional framework governing the financial sector has been built up over a century. There are over 60 Acts and multiple rules and regulations that govern the financial sector. Many of the financial sector laws date back several decades, when the financial landscape was very different from that seen today. For example, the Reserve Bank of India (RIB) Act and the Insurance Act are of 1934 and 1938 vintage respectively. Over the years, as the economy and the financial system have grown in size and sophistication, an increasing gap has come about between the requirements of the country and the present legal and regulatory arrangements.
The remit of the Commission is to comprehensively review and redraft the legislations governing Indian’s financial system, in order to evolve a common set of principles for governance of financial sector regulatory institutions. The FUSEL has suggested more comprehensive and wider coverage for consumer protection as opposed to the available ones. The commission has also envisaged a two-tier approach for the redress of consumer complaints: first at the level of the financial service provider and subsequently at the level to the redress agency. For this purpose, the draft Code recommended all financial service providers to have in place an effective mechanism to redress complaints from consumers. They would also be obliged to inform consumers about their right to seek redress and the process followed for it.
The commission has recommended the creation of a redress agency which will function as a unified grievance redress system for all financial services. To ensure complete fairness and avoid conflicts of interest, the redress agency will function independently from the regulators. The financial redress mechanism proposed by the commission will replace the existing financial sector- specific ombudsman systems such as the banking ombudsman and the insurance ombudsman although retail consumers will continue to have the option to approach other available forums, such as the consumer courts established under the Consumer Protection Act, 1986 and regular courts.
The report given by FUSEL says that there would be a unified regulatory mechanism where all type of the financial nonusers will be served under one roof. It ensures that consumes of all kind of products whether it is gold loan issued by NBS, debentures issued by Non financial companies or any other service, gets protection in any kind of participation in the financial system. It can be seen that in the current scenario, consumer protection is very minimal and at infant stage in sector like NBS, Cooperative Banks (not covered under BOO scheme), Chit fund companies. It is the urgent need of hour that a unified, regulator- owned grievance redressed mechanism comes into play to cover the whole uncial system.
Now many will argue that there is no need for this separate legislation when consumer protection act takes care of all the consumer grievances but there are following problems involved * Persons appointed under this act are not qualified and do not have such expertise which is needed to deal with complicated financial products. * The proceedings are held in Judicial way, resulting into unprecedented delays in settlement. * 3-tier structure involved in escalation of grievances also results into unnecessary complexities and delays in every stage of escalation process. The urgent need of the hour is that we come up with this new redressed mechanism as soon as possible. Indian Financial code suggested by FUSEL may take quite some time to become operational but the part dealing with consumer protection can be carved out and should be implemented at the earliest as there is less scope of conflicts and contraventions on the same.
