Government of India Volume I: Analysis and Recommendations

CONSUMER PROTECTION
The consumer protection part of the draft Code has three components: an enumerated
set of rights and protections for consumers, an enumerated set of powers in the
hands of the regulator, and principles that guide what power should be used under what
circumstances. The details of consumer protection would, of course, lie in the subordinated
legislation to be drafted by financial regulators. Whether or not, for example, loads
and other conflicted remuneration structures should be banned is a question that would
need to be addressed by the regulator. The regulator will use its authority to develop
subordinate legislation which will adapt over the years to reflect financial innovation,
technological change, and the evolving nature of the Indian economy. Alongside this
regulation-making mandate, the regulator would also have supervisory roles to ensure
compliance with the law.
In India, so far, the financial regulatory structure has been defined by sector, with
multiple laws and often multiple agencies covering various sectors. This has led to inconsistent
treatment, and regulatory arbitrage. Regulators have sometimes been lax in developing
required protections out of notions of facilitating growth in the industry. These
problems would be reduced by having a single principles-based law which would cover
the entire financial system. The Commission believes that an overarching principlesbased
body of law would allow regulatory flexibility, consistent treatment of consumers
across all aspects of their engagement with the financial system, fairness and ultimately
a more stable financial system.
Turning from prevention to cure, the Commission proposes the creation of a unified
financial redress agency. The redress agency is expected to have front-ends in every
district of India, where consumers of all financial products will be able to submit
complaints. Modern technology will be used to connect these front-ends into a centralised
light-weight adjudication process. A well structured work-flow process will support
speedy and fair handling of cases. Consumers will deal only with the redress agency
when they have grievances in any financial activity: they will not have to deal with multiple
agencies.
The complaints brought before the redress agency will shed light on where the problems
of consumer protection are being found, and thus suggest areas for improvement in
subordinated legislation. As such, a key feature of the redress agency will be the creation
of a feedback loop through which the computerised case database of the redress agency
will be utilised by the regulator to make better regulations on a systematic basis.
India needs a capable financial system, with sophisticated private financial firms.
However, the emergence of this financial system should not become a carte blanche for
clever financial firms who achieve undue influence with their regulators, to take unfair
Table of Recommendations 5.1 Framework on consumer protection
The draft Code contains a consolidated non-sector-specific financial consumer protection framework. It identifies
consumer protection as a key regulatory objective and contains the following preventive and curative components:
1. Preventive tools
◮ Certain protections are provided to all financial consumers.
◮ An additional set of protections are provided to unsophisticated or retail consumers.
◮ The regulator is given a list of enumerated powers which it can use in order to implement these protections.
◮ The regulator will be guided by a list of principles that should inform the exercise of its powers.
◮ The regulator has been given the power to supervise financial service providers and initiate enforcement
and disciplinary actions.
2. Curative tools
◮ Creation of an independent financial redress agency to redress complaints of retail consumers against
all financial service providers.
◮ A research program, applied to the data emanating from the redress agency, will feed back to the
regulator and thus enable improvements in its work.
44 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION