The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, headed by Nachiket Mor has said that there should be a banking point for withdrawals, payments and deposits within a 15-minute walk, by 2016. This can be done if banks open a bank account for the 250 million Aadhaar number-holders.
The Union ministry of corporate affairs organised 306 investor awareness programmes across the country in November last and 1,107 such programmes in the first eight months of FY13-14, through Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI) and the Institute of Cost Accountants of India.
Ironically, members of these organisations have contributed to poor corporate governance—one of the main reasons for investors turning away from stocks. Last year, 1,986 investor awareness programmes were organised, which cost Rs5 crore, money that was largely a waste.
Since banks are the biggest distributors for all financial products, they need to operate within a strong consumer protection framework. This is lacking
The Reserve Bank of India (RBI) is, finally, working on a consumer protection framework that will empower it to ensure that banks treat their customers fairly. This is in line with global best practices that RBI deputy governor Dr KC Chakrabarty has been espousing for a long time. The crux of the new thinking is that “self-regulation, often, does not work and a strong, intrusive and hands-on regulator/supervisor provides the confidence that markets will operate on sound principles and be free from unfair and unethical practices.”
In India, growing consumer complaints, media sting operations on banking practices, as well as RBI’s own observations based on inspection of banks, have repeatedly highlighted how they are willing to wink at the rules leading to the laundering of unaccounted money. At the same time, they happily sell toxic, third-party products to their own customers in violation of their fiduciary obligation to sell and recommend products appropriate to the customer’s needs and financial profile and after ensuring that she understands the risks involved.
Over the past year, RBI has repeatedly exhorted banks to treat customers fairly (TCF) through various public statements, meetings and circulars. But this is clearly not enough. While moral suasion may have worked in a closed economy, the freedom to fix charges and the formation of an informal pricing cartel through the Indian Bank’s Association (IBA) seems to have weakened RBI’s ability to compel good behaviour.
A voluntary code of adherence to customer services and the inadequate provisions of the Banking Ombudsman’s Act have also had little impact on critical issues such as pricing, mis-selling and grievance redress. A clear framework for customer services, empowering RBI to act against unfair practices, is the need of the hour, along with increased competition through new banks, so that banks, on their own, feel the pressure to treat their customers fairly.
RBI has already warned banks about the many practices that it considers unethical or unfair to customers. These include:
• Levying charges that are based on competition (or cartel) rather than costs for services. Levying charges when no service is provided (failure to maintain minimum balance, intersol charges, pre-payment penalty on loans, and cancellation of demand drafts) or where it is a security imperative (like text messages for transactions).
• Mis-selling of third-party products (like insurance), collective investment products (like art funds) and mutual funds, through monetary incentives to bank employees. Bundling insurance with loans, term deposits and other deals to earn fees.
• Misuse of floating rate policies to increase spread when interest rates rise, but failing to pass on interest rate cuts with the same alacrity. Offering better rates to new customers and treating existing customer unfairly. Taking advantage of the festive buying to mislead customers with false claims of zero interest through deals with manufacturers.
• Helping customers to avoid the tax reporting requirements by providing multiple customer identity numbers, splitting fixed deposits and accepting cash.
While these specifics may be covered by RBI’s customer protection framework, the conceptual raison d’être for this is the realisation, worldwide, that weak consumer protection poses a significant risk to the wider economy and the financial sector cannot be trusted to self-regulate, even in its self-interest.
For RBI to align its own customer protection framework with the demands from consumers, it would do well to consider some key suggestions from bodies such as Consumers International (CI) which is a worldwide federation of consumer groups and represents 220 members across 115 countries. Moneylife Foundation, our sister entity, has recently become a supporter member of CI. Some of the suggestions are still to be accepted by central banks across the world, although some countries have made big strides in their implementation.
CI points out that half the world’s population is still unbanked. This is a real concern in India, which probably has the largest number of unbanked persons worldwide. Unfortunately, financial inclusion has only meant various gimmicks, including the push for unique-identity-based bank accounts for delivery of subsidies, without any clear thought about how to ensure genuine usage that is cost-effective.
Banks want to charge customers for ATM transactions beyond the fifth every month, because interchange costs and taxes amount to nearly Rs20 per transaction. Banks need to push customers into making fewer transactions for higher denominations, but there is no attempt to ensure this through awareness campaigns; instead, they are toying with restrictive costs. At the same time, there is a push for biometric-enabled ATMs in the name of financial inclusion, which is sure to involve only low denomination transactions. Unfortunately, there is no pressure on banks to work with consumers, or consumer groups, to come up with innovative solutions to these issues.
CI also points to the need for a national consumer protection body that covers multiple regulators. Such an independent body was also recommended by the Financial Sector Legislative Reforms Commission (FSLRC), but has met with quiet and determined resistance from India’s multiple independent financial regulators. Interestingly, Indian financial regulators, including RBI, have signed a memorandum of understanding (MOU) to monitor large conglomerates, but there is no such understanding or cooperation for consumer protection, although it is clear that sale of third-party products by banks has cheated financial consumer the most.
Some of the other issues flagged by CI for the protection of financial consumers:
1. Information Design and Disclosure: Consumers should receive clear, sufficient, reliable, comparable and timely information about financial service products. The pricing should be clear and allow consumers to appreciate costs before buying a product and information must be provided in standard formats. Failure to do so should make contracts void. Financial products must be tested for quality and comprehension by companies and audited by regulators. This is a clear shift away from disclosure-based regimes.
2. Contracts, Charges and Practices: Regulators should introduce a requirement of comprehensibility and prohibit products that are not comprehensible to ordinary consumers without expert knowledge. Conflict of interest in the provision of advice and sale of financial services needs to be addressed. Financial advice to consumers should be separated from sales-based remuneration. And contracts with consumers should be void-able, if they fail to get informed consent of the consumer, charge unfair or unreasonable fees, or are contracts designed to ensure a waiver of basic consumer protection and sale of inappropriate products, based on the consumer’s profile.
3. Redress and Dispute Resolution Systems: Ensure that consumers have access to adequate redress mechanisms that are ‘expeditious, fair, inexpensive and accessible’.
While India surely needs to look at the global debate on this issue, it needs to formulate a policy that works best for India, taking into account our own socio-economic milieu. A strong national consumer protection body, as recommended by the FSLRC in India or Consumers International overseas, may not be immediately feasible in India. Instead, since banks remain the big and trusted source for selling a host of financial products, including wealth management and advisory services, a strong consumer protection framework under RBI is an immediate imperative.
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]