A few days ago, marketing expert Seth Godin made a point in his blog about something we have been pointing out for quite some time: the flaw in the concept of “buyer beware” or caveat emptor. “Buyer beware” is an accepted principle in commerce, especially retail transactions. What do we and Mr Godin have against it? First, let’s hear what he has to say: “Buyer Beware? Really? Is that really the attitude you want your audience to take? That they should be wary of what you say and what you offer and what you promise?”
Mr Godin goes on to offer companies an alternative: “How about buyer trust? How do you deal with customer disappointment or buyer remorse?” He explains: “It’s the difference between ‘tough luck, you should have read the fine print’ and ‘oh no! How can we help?’ If people know you will always make it right, they will beware less and trust more.”
This would be a paradigm shift. The concept of caveat emptor is embedded in all transactions. It is taught to us in commerce and law classes in colleges. Courts decide on this basis. But does it really make sense? According to Wikipedia: “generally caveat emptor is a principle of property law that controls the sale of real property after the date of closing. Under the principle of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud.”
But in an interconnected world, with the Internet, social media and even greater competition, pushing the job of reading the fine print on the buyer and making a monkey out of him is an anachronism.
Of course, the whole concept of “buyer beware” has been somewhat mitigated by two developments. First, that amazing American policy of “returns without questions asked”. But this policy has been copied very reluctantly, if at all, by the same US multinationals in the third world. Some e-commerce companies funded by generous private equity investors are now beginning to offer unconditional return. The second factor is consumer protection laws that are supposed to help customers when they are handed down patently unfair terms. The National Consumer Disputes Redressal Commission (NCDRC) has this to say: “Spelling out the rights and remedies of the consumers in a market so far dominated by organised manufacturers and traders of goods and providers of various types of services, [the Consumer Protection Act, 1986] makes the dictum, caveat emptor (buyer beware), a thing of the past.”
This is hyperbole. What NCDRC is focused on is the narrow legality of provable cases of wrongdoing. In the financial sector, a perfectly legal transaction could well inflict deep losses! Consider a recent case, reported in Moneylife, of how the life savings of a retired wing commander were wiped out by a brokerage company through reckless speculative transactions done without the customer’s knowledge. Until now, cases like these used to hide behind the fig leaf of power of attorney (PoA) that brokerage companies got customers to sign. The PoA was offered as a proof that the customer had completely turned over decision-making to the broker. In this case it turns out the customer refused to sign a PoA — which was obviously forged. The client won his case in the consumer court. But the market regulator, Securities and Exchange Board of India, blatantly threw the case out without a hearing and sided with this dubious broker — which otherwise touts the principles of value investing. No matter how aware you are as a buyer, can you deal with this?
Thanks to extensive neurological experiments done over the last decades, we now know much more about what drives our buying decisions. In the light of this knowledge, legal principles must distinguish between products (tangible) and services (intangible), especially financial services, which are essentially promises of the future.
The buyer of tangible products at least gets a chance to touch, feel and see what she is buying. Manufacturing defects are addressed by replacement. But an insurance policy? Useless, unless it is tested by an insurance claim sometime in the future. Mutual funds bought today? Their past performance does not say what they will fetch in the future. Until then, their utility is unclear. Corporate fixed deposits? You need to get back your interest and principal, only after which you can say that the transaction was correct. A broking account? Making money through a minefield of daily calls, dubious stocks that speculators want to dump on you through your trusted broker, is nearly impossible unless you have seen it all and are using stock brokers for what they are — a necessary evil.
In all these cases, a buyer simply cannot fully “beware”. She is not hardwired to be, as neuroeconomics has conclusively proved. And so, the seller, supported by the regulators, and the principle of caveat emptor, has a massive unfair advantage. Most tellingly, there is no concept of replacement in financial services. If there are no returns and no replacement policies, isn’t it logical that policy makers ought to be promoting the concept of “seller beware”? How can one take this forward and implement it? That will be the subject of a future piece.
The writer is the editor of www.moneylife.in editor@moneylife.in
