Government of India Volume I: Analysis and Recommendations

CHAPTER 5
Consumer protection
5.1. Strategic picture
A well functioning financial system should allow individuals, households and enterprises
to efficiently allocate and manage their resources and protect themselves from risk, through
the use of financial products and services. This involves complex interactions between
consumers and financial service providers. At a first level, these interactions require
the support of law to define and protect property rights and facilitate the enforcement
of contracts.
However, the complexity of financial markets and the existence of market failures in
the form of information asymmetries, market externalities and differences in the bargaining
powers of consumers and service providers, create the need for a higher standard of
protection for financial consumers. The need for financial consumers to be treated fairly
makes it appropriate to adopt a more intrusive approach to financial regulation, when
compared with most other fields.
Currently, the strategy in Indian finance is focused on the doctrine of caveat emptor:
let the buyer beware. Beyond protection from fraud and provisions to ensure full disclosure,
consumers are generally left to their own devices. After extensive analysis and
debate on these questions, the Commission believes that to the extent that consumers
of financial services are more vulnerable than consumers of ordinary goods and services,
higher standards of protection ensured by special efforts of the State are justified.
The vulnerability of consumers reflects a major gap in Indian financial regulation,
which needs to be addressed. As such, the Commission recommends the adoption of a
consolidated, non-sector-specific, consumer protection framework for the entire financial
system that will empower and require regulators to pursue consumer protection for
the financial activities regulated by them. In this context, the draft Code approaches the
problems of consumer protection on two fronts: prevention and cure.
Prevention requires regulation-making and enforcement across the entire financial
system from the viewpoint of consumer interests. For example, looking at questions of
remuneration and conflicts of interest, when a sales agent sells a financial product to a
household, and gets paid a fee by the producer of this financial product, is there a problem
with conflicts of interest? How do we evolve a structure where the provider acts in the
best interest of the consumer? Regulators should be obliged to grapple with questions
such as these.
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