Government of India Volume I: Analysis and Recommendations

CONSUMER PROTECTION
Table of Recommendations 5.8 Suitability assessment process
1. A person making a recommendation to a retail consumer about the purchase of a financial product or service
must make efforts to obtain correct and complete relevant information about the consumer’s personal circumstances.
Advice given to the retail consumer must be based on due consideration of the relevant personal
circumstances.
2. If the advisor finds that the information is inaccurate or incomplete, the retail consumer must be warned
about the consequences of using such information.
3. If a retail consumer plans to avail a financial product or service that the advisor does not deem suitable, it is
the obligation of the advisor to clearly communicate the consequences to the retail consumer.
4. The regulator must specify the financial products or services that may be provided to retail consumers or a
class of retail consumers only after proper advice has been given to them. Suitability assessment should be
mandatory for those categories of products and services.
5. The regulator must take into account the following factors while making advice mandatory for any financial
product or service:
◮ the potential negative consequences to financial access due to the cost that will be imposed on financial
service providers on account of suitability requirements; and
◮ the extent to which fair disclosures required under the law may suffice to enable retail consumers to
assess the suitability of the financial product or service for their purposes.
structure of benefits permitted to be received by an advisor for a particular financial product or
service.
5.6. Functions and powers of the regulator
The Commission recommends the creation of a single consumer protection framework
which will apply to all parts of the financial system. The consumer protection framework
may be implemented by one or more regulators, depending on the views of lawmakers
about financial regulatory architecture. While the financial regulatory architecture may
change, it is expected that the consumer protection framework would not.
The general functions of a regulator include: making regulations to carry out the purposes
of the law; issuing guidance to financial service providers; supervising the conduct
of financial service providers to ensure compliance with the law; and taking appropriate
enforcement actions to deal with any violations.
The regulator will also be responsible for the existence of financial awareness programmes
in order to meet the objective of promoting public awareness in financial matters.
This will involve spreading awareness about the benefits of financial planning, protections
available to consumers, and features and functions of financial products and services.
If required, the regulator may also choose to establish a separate financial awareness
body to pursue this function.
In exercise of its supervisory functions, the regulator will need to put in place appropriate
arrangements for seeking relevant information from financial service providers,
imposing record-keeping requirements, conducting investigations, inspecting premises
and holding meetings with the officers of financial service providers. If the regulator has
reasonable grounds to suspect a violation of the law, it may initiate appropriate enforcement
actions.
In addition to the general functions of rule-making, supervision and enforcement,
the draft Code will contain the following specific provisions:
1. Registration of individuals
Proper training and qualification of front line staff can be an effective tool for ensuring that the
protections envisaged by the law translate into actual practice. To achieve this, the draft Code
will require registration of all individuals who deal with consumers in connection with provision
of a financial product or service. This would include individuals who deal with consumers in
their capacity as financial service providers or as employees or representatives of financial service
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 49