We need an independent agency whose only job is to protect customers of financial services
16-Nov-2015 •Dhirendra Kumar
If you regularly read business and investment related news, you would certainly be aware of the financial services regulatory structure that we have in India, wherein IRDA regulates insurance, RBI regulates banks, SEBI regulates mutual funds, equity markets etc. You would probably be aware of the financial regulatory agencies which operate in various countries, like the SEC and the Fed in the US, the FSA in the UK etc.
However, few would have heard of the one such agency in a foreign country whose equivalent India needs most. This is the Consumer Financial Protection Bureau (CFPB) which operates in the US. This agency was set up in the aftermath of the 2010 financial crisis, with a broad brief of proactively saving consumers from the predatory practices of financial businesses.
In India, these functions are part of the brief of sector regulators like IRDA, SEBI and RBI. In the future, if and when the FSLRC recommendations get actualised, we might get a separate consumer protection organisation.
However, I wouldn't get my hopes up too high that this will happen in a meaningful sense. The existing regulators are loathe to let anyone lay siege to their fiefdom, and those who would benefit the most from an agency focused on stamping out financial malpractices have no voice here.
Why is a xxxx-type agency needed? The reasons are clear. One, when you are responsible for both developing and policing something, then you develop a vested interest in not admitting that there's anything wrong in that sector. You will admit to players breaking the rules, but will strongly resist any suggestion that consumers can be defrauded while staying within the regulatory regime that you have created.
The worst example of this were ULIPs. Consumers were being taken to the cleaners by insurers and their agents, but for years, IRDA refused to even consider the possibility that there was something deeply wrong in the product design that it had approved. There are similar examples from RBI and SEBI too. While chasing illegal operations like the countless deposit schemes that run across the country is something on which there is some clear move forward, a lot of damage is deliberately done to customers' finances by legal, regulated entities while operating within the letter of the law. This needs an outside agency to tackle.
Basically, someone has to actively hunt down legal yet predatory behaviour from financial services providers. This is almost completely missing in India, where we are more or less stuck in the 'responding to complaints' police paradigm.
There's an excellent current example of this from CFPB's actions. The agency is acting against credit card issuers who use customer agreements to curtail the legal recourse available to customers. Buried in the mass of fine print that customers have to sign to get a credit card, there are clauses binding them to use only private arbitration instead of ever filing a court case, and to never become part of a class action suit.
The interesting thing here is that once such abusive conditions have come to light, it's proactively reviewing customer agreements from all providers over a large range of products for all kinds of problems. Customer agreements are designed so that customers don't read and can't understand them. So it's great that someone else is doing it for them.
The customer agreements of Indian banks too are rife with clauses that are hostile to customers. Since customers sign them willingly, the regulator can wash its hands off the matter. However, the reality is that there is a tremendous asymmetry between the legal knowledge, time and resources available to those who draft these agreements and the customers who sign them.
In the US, there is now considerable hostility that Wall Street displays towards CFPB. Which obviously means that the agency is doing its job well. In India too, regardless of the improvements that the sectoral regulators make or don't make on their functioning, they need a unified external examiner to act as a final voice which speaks only for the customer.