The Reserve Bank of India (RBI) recently placed a draft charter of customer rights on its website for public comments. This is in line with its objective to "frame comprehensive consumer protection regulations based on domestic experience and global best practices".
The draft charter lists broad principles such as the consumers' right to fair treatment, transparency, fair and honest dealing , suitability, privacy and right to grievance redressal and compensation. In an annexure, it makes an attempt at outlining how these principles should work without going into too much detail.
Unfortunately, the draft charter is unlikely to make any difference to consumer protection. There already exists a 'code of customer rights', adopted by banks as part of the code of a bank's commitment to customers. This is much more comprehensive than RBI's draft. It is also violated with impunity, as is evident from various official reports, as well as publicly available documents. Let us take suitability as an example. The code already has well laid-out provisions under 'third-party products', where each bank undertakes: "We will sell a product to you if we believe it is suitable and appropriate for you."
Despite this clear commitment, selling life insurance policies to retired people with no earned incomes has been documented numerous times, including in a scathing judgment of the Allahabad High Court. Another example from the code is that the banks pledge "when you avail a banking service from us, we will not compel you to purchase/subscribe to any third-party product as a quid pro quo". Yet, this is openly violated at least in the case of loans, where insurance policies from a particular provider preferred by the bank are forced on to the consumer. Thus, despite clear provisions in the code, there are open and repeated violations and many other violations continue to occur with monotonous regularity.
The reason is not far to seek. The charter of rights is only the first step towards consumer protection. The regulator needs to provide for continuous review of how the charter of rights is applied in practice. This needs specialised handling distinct from regulating the bank itself. That's the reason the Financial Sector Legislative Reforms Commission has recommended setting up a "supervisory function to ensure compliance with the consumer protection rules".
The supervisory function is distinct from the grievance redressal machinery in that it proactively seeks out areas where the code is being violated and makes sure these do not occur; or where they occur, it is open to further action without waiting for the consumer to file a grievance. The supervisory function should also ideally be responsible for deciding on the action to be taken on its findings, including levying penalties as well as taking action against bank managements that repeatedly design or implement products or services that routinely violate the consumer protection promises made in law or their own charter.
There isn't a lack of consumer protection laws in the Indian financial sector. What is lacking is the will to actually implement these in letter and spirit. Only addressing consumer grievances better is not going to improve consumer protection, as only the more active consumers seek the admittedly better grievance redressal mechanisms that have now been put in place. The majority of consumers suffer the consequences silently, and they lose faith in the formal financial sector. There is a need to have an empowered supervisory organisation within RBI, which has the mandate to exclusively monitor implementation of the existing consumer protection laws at the risk of serious consequences. Banks will know the regulator is serious about consumer protection laws if and when this supervisory organisation dismisses an otherwise well-performing bank chief executive or levies fines running into hundreds of crores of rupees, purely for violating consumer-protection laws.
Till that day, this draft charter is like many others before it. A well-meaning document that will not change anything.
The draft charter lists broad principles such as the consumers' right to fair treatment, transparency, fair and honest dealing , suitability, privacy and right to grievance redressal and compensation. In an annexure, it makes an attempt at outlining how these principles should work without going into too much detail.
Unfortunately, the draft charter is unlikely to make any difference to consumer protection. There already exists a 'code of customer rights', adopted by banks as part of the code of a bank's commitment to customers. This is much more comprehensive than RBI's draft. It is also violated with impunity, as is evident from various official reports, as well as publicly available documents. Let us take suitability as an example. The code already has well laid-out provisions under 'third-party products', where each bank undertakes: "We will sell a product to you if we believe it is suitable and appropriate for you."
Despite this clear commitment, selling life insurance policies to retired people with no earned incomes has been documented numerous times, including in a scathing judgment of the Allahabad High Court. Another example from the code is that the banks pledge "when you avail a banking service from us, we will not compel you to purchase/subscribe to any third-party product as a quid pro quo". Yet, this is openly violated at least in the case of loans, where insurance policies from a particular provider preferred by the bank are forced on to the consumer. Thus, despite clear provisions in the code, there are open and repeated violations and many other violations continue to occur with monotonous regularity.
The reason is not far to seek. The charter of rights is only the first step towards consumer protection. The regulator needs to provide for continuous review of how the charter of rights is applied in practice. This needs specialised handling distinct from regulating the bank itself. That's the reason the Financial Sector Legislative Reforms Commission has recommended setting up a "supervisory function to ensure compliance with the consumer protection rules".
The supervisory function is distinct from the grievance redressal machinery in that it proactively seeks out areas where the code is being violated and makes sure these do not occur; or where they occur, it is open to further action without waiting for the consumer to file a grievance. The supervisory function should also ideally be responsible for deciding on the action to be taken on its findings, including levying penalties as well as taking action against bank managements that repeatedly design or implement products or services that routinely violate the consumer protection promises made in law or their own charter.
There isn't a lack of consumer protection laws in the Indian financial sector. What is lacking is the will to actually implement these in letter and spirit. Only addressing consumer grievances better is not going to improve consumer protection, as only the more active consumers seek the admittedly better grievance redressal mechanisms that have now been put in place. The majority of consumers suffer the consequences silently, and they lose faith in the formal financial sector. There is a need to have an empowered supervisory organisation within RBI, which has the mandate to exclusively monitor implementation of the existing consumer protection laws at the risk of serious consequences. Banks will know the regulator is serious about consumer protection laws if and when this supervisory organisation dismisses an otherwise well-performing bank chief executive or levies fines running into hundreds of crores of rupees, purely for violating consumer-protection laws.
Till that day, this draft charter is like many others before it. A well-meaning document that will not change anything.
The author is CEO, Apnapaisa