Monday, December 5, 2016

Protection of Financial Consumers under the Indian Financial Code

[The following guest post is contributed by Sharada Krishnamurthy, LLM student, National University of Singapore and Gokul Ashok Thampi, final year BSL LLB student, ILS Law College, Pune]

Introduction

Existing financial regulation in India has been amended multiple times resulting in inconsistencies, regulatory gaps and overlaps. There are several regulators with overlapping domains, thereby creating confusion. In order to remedy this, a need was felt to revamp the financial system in order to make it more dynamic and vibrant. As a result, the Government of India, Ministry of Finance, by way of a resolution dated 24th March 2011, set up the Financial Sector Legislative Commission (“FSLRC”).

The FSLRC drafted the Indian Financial Code (the “Code”) and also recommended nine components of focus including consumer protection, microprudential regulations, capital controls, systemic risks, public debt management, among others. This post focuses on the various protections available for financial consumers, including the redressal mechanism.

Protection of Financial Consumers

The global financial crisis of 2008 highlighted the need for protection of financial consumers, as consumers today face a more sophisticated and complex market structure. Building and maintaining consumer confidence and trust in financial markets promotes efficiency and stability and helps create positive outcomes for both financial institutions and their customers.[1]

In India, lessons from Sahara and Satyam changed the financial market milieu. Protection of consumers from financial frauds became the need of the hour.

Who is a financial consumer?

The Code provides a very simple definition of a “financial consumer” to be any consumer who avails or intends to avail a financial service or who has a right or interest in a financial product.[2]

These financial services can range from buying, selling, subscribing to a financial product, accepting deposits, safeguarding or administering assets consisting of financial products, managing assets consisting of financial products, and to rendering advice on financial products.[3] On the other hand, the term “financial products” is defined to include securities, contracts of insurance, deposits, credit arrangements, retirement benefit plans, small savings instruments and foreign currency contracts.[4]

This comprehensive definition seeks to bring within its ambit every such personnel or organisation whose interests are likely to be affected by even their slightest involvement in the financial regime. The Code is thereby seeking to provide a blanket protection of such personnel or organisation.

Breaking down Part-VII of the Code

The objective of the Code is to ensure that the regulators protect the interests of the consumers and promote public awareness on matters relating to financial products and financial services.[5]

The Code provides for a need-based protection regime of the consumers. The extent of protection is dependent on the level of knowledge, expertise and experience of the consumer.[6] If the consumer happens to be an amateur in her dealings, her level of dependence on the service provider is automatically high, which alters the level of protection that should be guaranteed by the regulators. Additionally, the nature of risk embodied in the financial instrument and product is also considered, implying higher wall of protection that is commensurate with higher risk.

In order to protect consumers from unscrupulous activities of service providers, the Code declares any unfair non-negotiated term in a financial contract to be void.[7] Such unfairness could arise in instances where such a term or provision is not required to reasonably protect the interests of the service provider, or it works to the detriment of the consumer. It is important that the consumer understands every term of the financial product or service which should be provided to her in simple plain language and that she be allowed to compare it with other contracts for similar financial products or services,[8] thereby ensuring that her freedom of choice is guaranteed. For a contract to be fair and negotiable, it is important that both the consumer and the service provider share equal bargaining power in determining the provisions of the contract; having clarity of the terms and conditions certainly enhances consumer confidence and improves their bargaining power. Freedom of choice and freedom to contract empower the consumers to negotiate a contract for fulfilment of their interests, which is the ultimate objective of the Code.

Further, the Code strictly prohibits any misleading or unfair conduct on part of the service providers.[9] Every financial consumer is entitled to accurate information regarding the main characteristics of a financial product or service, the benefits and risks associated, details regarding consideration to be paid, and the rights of consumer under any law or regulation.[10] Such protection is not only limited to accurate information and the like, but also includes a prohibition on the service provider from abusing its position by coercing or unduly influencing a consumer to make a transactional decision that she would not have otherwise made.[11] This protection becomes essential in transactions where the service provider happens to be in an influential position as compared to the consumer, say in an employer-employee relationship, and the service provider is in a position to dominate the will of the consumer. It seems the drafters of the Code have devised this provision, keeping in view the ‘developing’ status of Indian financial sector and the inferior state of knowledge of its consumers.

Right to information is a right guaranteed to every consumer under the Consumer Protection Act, 1986; under the Code, the same has been extended even to financial consumers. All such information which is required for a consumer to make an informed transactional decision is required to be disclosed by the service provider. Such a disclosure must be adequately made before the consumer enters into the transaction and in a manner that the consumer understands, thereby giving her an opportunity to make a reasonable comparison with similar products and services.[12] This provision makes it clear that mere disclosure is not enough; effective disclosure in a manner that can be easily comprehended by the consumer is mandated.

Further, the Code not only limits the protection of consumers with respect to the products they buy and the services they avail, but also to the personal information they share with the service providers in the course of the transaction. As under the Code, the service provider must maintain the confidentiality of such information and not disclose it to third parties, unless there is express consent by the consumer, or a court/tribunal order which warrants the same, or any such arrangement with the third party as permitted under the Code where information is shared with a third party.[13] Confidentiality of information builds consumer confidence in the service provider, thereby empowering them, and enabling them to strike a satisfying deal.

Redress Agency

Redressal mechanisms are the most important rights of any consumer, because, as the conventional rule goes: ‘a right without remedy is no right at all.’ The Code directs every financial service provider to provide an effective mechanism to receive and redress any complaint received by them with respect to any products or services provided by them. Merely setting up a redress agency does not suffice, unless the accessibility and awareness requirements are met. In order to cope with that, the Code casts an obligation on the service provider to keep the consumers informed of their right to seek redressal, the procedure for the same, time period within which such a complaint is to be filed and other such details.[14]

In order to make all the above mentioned privileges and rights granted to a financial consumer effective, and to ensure consumer awareness, the Code further recommends the establishment of a ‘financial awareness body’.[15] This body will be instituted with the sole objective of promoting financial awareness and will follow procedures as established under the Code.

Conclusion

The Code accords the much needed protection of financial consumers. In order to ensure a safe and sound financial system, it is imperative that financial consumers, who constitute one of the most important parts of it, are given adequate protection, failing which, an event of breakdown of the entire system would not be too far away.

Keeping in mind the Indian scenario, it is equally important to ensure that the enforcement of these provisions be made stringently. Particularly, the functioning of the redressal agencies need careful attention. Speedy redressal is the need of the hour. Vesting rights and privileges in financial consumers is as important as spreading awareness of the same. The Code addresses all these concerns and promises a healthy financial system. This is enough reason for the Parliament not to delay any further in adopting this as part of the legislative framework.

- Sharada Krishnamurthy & Gokul Ashok Thampi




[1] http://www.oecd.org/regreform/sectors/financialconsumerprotection.htm.
[2] Clause 2(35), Code.
[3] Clause 2(76), Code.
[4] Clause 2(73), Code.
[5] Clause 105, Code.
[6] Clause 106(1)(a), Code.
[7] Clause 109, Code.
[8] Clause 109, Code.
[9] Clause 110, Code.
[10] Clause 112, Code.
[11] Clause 110, Code.
[12] Clause 112, Code.
[13] Clause 116, Code.
[14] Clause 136, Code.
[15] Clause 147, Code.

2 comments:

Anonymous said...

What happens in the case of Standard Form Contracts? Is the entire contract void unless it has been explained to the consumer/does the consumer have any leeway to modify the contract.

Anonymous said...

In standard form contracts, there is no option to the offeree to modify the contract, which is a unique feature about such contracts distinguishing them from other negotiated contracts. Under the Code, to establish unfairness of a contract, the considerations include, the consumer not being provided with the information in a language he understands, or, legibly and clearly, consumer not getting an opportunity to compare the said contract with contracts of similar nature, etc. The same considerations apply even in the case of a standard form contract to determine its fairness. Clause 109 embodies the tenets of unconscionability of contracts.
We hope this answers your query.

-Sharada and Gokul.