[The
following guest post is contributed by Sharada
Krishnamurthy, LLM student,
National University of Singapore and Gokul
Ashok Thampi, final year BSL LLB
student, ILS Law College, Pune]
following guest post is contributed by Sharada
Krishnamurthy, LLM student,
National University of Singapore and Gokul
Ashok Thampi, final year BSL LLB
student, ILS Law College, Pune]
Introduction
Existing financial regulation in India has been amended
multiple times resulting in inconsistencies, regulatory gaps and overlaps.
There are several regulators with overlapping domains, thereby creating
confusion. In order to remedy this, a need was felt to revamp the financial
system in order to make it more dynamic and vibrant. As a result, the
Government of India, Ministry of Finance, by way of a resolution dated 24th
March 2011, set up the Financial Sector Legislative Commission (“FSLRC”).
multiple times resulting in inconsistencies, regulatory gaps and overlaps.
There are several regulators with overlapping domains, thereby creating
confusion. In order to remedy this, a need was felt to revamp the financial
system in order to make it more dynamic and vibrant. As a result, the
Government of India, Ministry of Finance, by way of a resolution dated 24th
March 2011, set up the Financial Sector Legislative Commission (“FSLRC”).
The FSLRC drafted the Indian Financial Code (the “Code”) and
also recommended nine components of focus including consumer protection, microprudential
regulations, capital controls, systemic risks, public debt management, among
others. This post focuses on the various protections available for financial
consumers, including the redressal mechanism.
also recommended nine components of focus including consumer protection, microprudential
regulations, capital controls, systemic risks, public debt management, among
others. This post focuses on the various protections available for financial
consumers, including the redressal mechanism.
Protection of Financial
Consumers
Consumers
The global financial crisis of 2008 highlighted the need for
protection of financial consumers, as consumers today face a more sophisticated
and complex market structure. Building and maintaining consumer confidence and
trust in financial markets promotes efficiency and stability and helps create
positive outcomes for both financial institutions and their customers.[1]
protection of financial consumers, as consumers today face a more sophisticated
and complex market structure. Building and maintaining consumer confidence and
trust in financial markets promotes efficiency and stability and helps create
positive outcomes for both financial institutions and their customers.[1]
In India, lessons from Sahara
and Satyam changed the financial
market milieu. Protection of consumers from financial frauds became the need of
the hour.
and Satyam changed the financial
market milieu. Protection of consumers from financial frauds became the need of
the hour.
Who is a financial consumer?
The Code provides a very simple definition of a “financial
consumer” to be any consumer who avails or intends to avail a financial service
or who has a right or interest in a financial product.[2]
consumer” to be any consumer who avails or intends to avail a financial service
or who has a right or interest in a financial product.[2]
These financial services can range from buying, selling, subscribing
to a financial product, accepting deposits, safeguarding or administering
assets consisting of financial products, managing assets consisting of
financial products, and to rendering advice on financial products.[3] On the other hand, the
term “financial products” is defined to include securities, contracts of
insurance, deposits, credit arrangements, retirement benefit plans, small
savings instruments and foreign currency contracts.[4]
to a financial product, accepting deposits, safeguarding or administering
assets consisting of financial products, managing assets consisting of
financial products, and to rendering advice on financial products.[3] On the other hand, the
term “financial products” is defined to include securities, contracts of
insurance, deposits, credit arrangements, retirement benefit plans, small
savings instruments and foreign currency contracts.[4]
This comprehensive definition seeks to bring within its
ambit every such personnel or organisation whose interests are likely to be
affected by even their slightest involvement in the financial regime. The Code
is thereby seeking to provide a blanket protection of such personnel or
organisation.
ambit every such personnel or organisation whose interests are likely to be
affected by even their slightest involvement in the financial regime. The Code
is thereby seeking to provide a blanket protection of such personnel or
organisation.
Breaking down Part-VII
of the Code
of the Code
The objective of the Code is to ensure that the regulators protect
the interests of the consumers and promote public awareness on matters relating
to financial products and financial services.[5]
the interests of the consumers and promote public awareness on matters relating
to financial products and financial services.[5]
The Code provides for a need-based protection regime of the
consumers. The extent of protection is dependent on the level of knowledge,
expertise and experience of the consumer.[6] If the consumer happens to
be an amateur in her dealings, her level of dependence on the service provider
is automatically high, which alters the level of protection that should be
guaranteed by the regulators. Additionally, the nature of risk embodied in the
financial instrument and product is also considered, implying higher wall of
protection that is commensurate with higher risk.
consumers. The extent of protection is dependent on the level of knowledge,
expertise and experience of the consumer.[6] If the consumer happens to
be an amateur in her dealings, her level of dependence on the service provider
is automatically high, which alters the level of protection that should be
guaranteed by the regulators. Additionally, the nature of risk embodied in the
financial instrument and product is also considered, implying higher wall of
protection that is commensurate with higher risk.
In order to protect consumers from unscrupulous activities
of service providers, the Code declares any unfair non-negotiated term in a
financial contract to be void.[7] Such unfairness could
arise in instances where such a term or provision is not required to reasonably
protect the interests of the service provider, or it works to the detriment of
the consumer. It is important that the consumer understands every term of the
financial product or service which should be provided to her in simple plain
language and that she be allowed to compare it with other contracts for similar
financial products or services,[8] thereby ensuring that her freedom
of choice is guaranteed. For a contract to be fair and negotiable, it is
important that both the consumer and the service provider share equal
bargaining power in determining the provisions of the contract; having clarity
of the terms and conditions certainly enhances consumer confidence and improves
their bargaining power. Freedom of choice and freedom to contract empower the
consumers to negotiate a contract for fulfilment of their interests, which is
the ultimate objective of the Code.
of service providers, the Code declares any unfair non-negotiated term in a
financial contract to be void.[7] Such unfairness could
arise in instances where such a term or provision is not required to reasonably
protect the interests of the service provider, or it works to the detriment of
the consumer. It is important that the consumer understands every term of the
financial product or service which should be provided to her in simple plain
language and that she be allowed to compare it with other contracts for similar
financial products or services,[8] thereby ensuring that her freedom
of choice is guaranteed. For a contract to be fair and negotiable, it is
important that both the consumer and the service provider share equal
bargaining power in determining the provisions of the contract; having clarity
of the terms and conditions certainly enhances consumer confidence and improves
their bargaining power. Freedom of choice and freedom to contract empower the
consumers to negotiate a contract for fulfilment of their interests, which is
the ultimate objective of the Code.
Further, the Code strictly prohibits any misleading or
unfair conduct on part of the service providers.[9] Every financial consumer
is entitled to accurate information regarding the main characteristics of a
financial product or service, the benefits and risks associated, details
regarding consideration to be paid, and the rights of consumer under any law or
regulation.[10]
Such protection is not only limited to accurate information and the like, but
also includes a prohibition on the service provider from abusing its position
by coercing or unduly influencing a consumer to make a transactional decision
that she would not have otherwise made.[11] This protection becomes
essential in transactions where the service provider happens to be in an
influential position as compared to the consumer, say in an employer-employee
relationship, and the service provider is in a position to dominate the will of
the consumer. It seems the drafters of the Code have devised this provision,
keeping in view the ‘developing’ status of Indian financial sector and the inferior
state of knowledge of its consumers.
unfair conduct on part of the service providers.[9] Every financial consumer
is entitled to accurate information regarding the main characteristics of a
financial product or service, the benefits and risks associated, details
regarding consideration to be paid, and the rights of consumer under any law or
regulation.[10]
Such protection is not only limited to accurate information and the like, but
also includes a prohibition on the service provider from abusing its position
by coercing or unduly influencing a consumer to make a transactional decision
that she would not have otherwise made.[11] This protection becomes
essential in transactions where the service provider happens to be in an
influential position as compared to the consumer, say in an employer-employee
relationship, and the service provider is in a position to dominate the will of
the consumer. It seems the drafters of the Code have devised this provision,
keeping in view the ‘developing’ status of Indian financial sector and the inferior
state of knowledge of its consumers.
Right to information is a right guaranteed to every consumer
under the Consumer Protection Act, 1986; under the Code, the same has been
extended even to financial consumers. All such information which is required
for a consumer to make an informed transactional decision is required to be
disclosed by the service provider. Such a disclosure must be adequately made
before the consumer enters into the transaction and in a manner that the
consumer understands, thereby giving her an opportunity to make a reasonable
comparison with similar products and services.[12] This provision makes it
clear that mere disclosure is not enough; effective disclosure in a manner that
can be easily comprehended by the consumer is mandated.
under the Consumer Protection Act, 1986; under the Code, the same has been
extended even to financial consumers. All such information which is required
for a consumer to make an informed transactional decision is required to be
disclosed by the service provider. Such a disclosure must be adequately made
before the consumer enters into the transaction and in a manner that the
consumer understands, thereby giving her an opportunity to make a reasonable
comparison with similar products and services.[12] This provision makes it
clear that mere disclosure is not enough; effective disclosure in a manner that
can be easily comprehended by the consumer is mandated.
Further, the Code not only limits the protection of
consumers with respect to the products they buy and the services they avail,
but also to the personal information they share with the service providers in
the course of the transaction. As under the Code, the service provider must
maintain the confidentiality of such information and not disclose it to third
parties, unless there is express consent by the consumer, or a court/tribunal
order which warrants the same, or any such arrangement with the third party as
permitted under the Code where information is shared with a third party.[13] Confidentiality of
information builds consumer confidence in the service provider, thereby
empowering them, and enabling them to strike a satisfying deal.
consumers with respect to the products they buy and the services they avail,
but also to the personal information they share with the service providers in
the course of the transaction. As under the Code, the service provider must
maintain the confidentiality of such information and not disclose it to third
parties, unless there is express consent by the consumer, or a court/tribunal
order which warrants the same, or any such arrangement with the third party as
permitted under the Code where information is shared with a third party.[13] Confidentiality of
information builds consumer confidence in the service provider, thereby
empowering them, and enabling them to strike a satisfying deal.
Redress Agency
Redressal mechanisms are the most important rights of any
consumer, because, as the conventional rule goes: ‘a right without remedy is no
right at all.’ The Code directs every financial service provider to provide an
effective mechanism to receive and redress any complaint received by them with
respect to any products or services provided by them. Merely setting up a redress
agency does not suffice, unless the accessibility and awareness requirements
are met. In order to cope with that, the Code casts an obligation on the
service provider to keep the consumers informed of their right to seek
redressal, the procedure for the same, time period within which such a
complaint is to be filed and other such details.[14]
consumer, because, as the conventional rule goes: ‘a right without remedy is no
right at all.’ The Code directs every financial service provider to provide an
effective mechanism to receive and redress any complaint received by them with
respect to any products or services provided by them. Merely setting up a redress
agency does not suffice, unless the accessibility and awareness requirements
are met. In order to cope with that, the Code casts an obligation on the
service provider to keep the consumers informed of their right to seek
redressal, the procedure for the same, time period within which such a
complaint is to be filed and other such details.[14]
In order to make all the above mentioned privileges and
rights granted to a financial consumer effective, and to ensure consumer awareness,
the Code further recommends the establishment of a ‘financial awareness body’.[15] This body will be
instituted with the sole objective of promoting financial awareness and will
follow procedures as established under the Code.
rights granted to a financial consumer effective, and to ensure consumer awareness,
the Code further recommends the establishment of a ‘financial awareness body’.[15] This body will be
instituted with the sole objective of promoting financial awareness and will
follow procedures as established under the Code.
Conclusion
The Code accords the much needed protection of financial
consumers. In order to ensure a safe and sound financial system, it is
imperative that financial consumers, who constitute one of the most important
parts of it, are given adequate protection, failing which, an event of
breakdown of the entire system would not be too far away.
consumers. In order to ensure a safe and sound financial system, it is
imperative that financial consumers, who constitute one of the most important
parts of it, are given adequate protection, failing which, an event of
breakdown of the entire system would not be too far away.
Keeping in mind the Indian scenario, it is equally important
to ensure that the enforcement of these provisions be made stringently.
Particularly, the functioning of the redressal agencies need careful attention.
Speedy redressal is the need of the hour. Vesting rights and privileges in
financial consumers is as important as spreading awareness of the same. The
Code addresses all these concerns and promises a healthy financial system. This
is enough reason for the Parliament not to delay any further in adopting this
as part of the legislative framework.
to ensure that the enforcement of these provisions be made stringently.
Particularly, the functioning of the redressal agencies need careful attention.
Speedy redressal is the need of the hour. Vesting rights and privileges in
financial consumers is as important as spreading awareness of the same. The
Code addresses all these concerns and promises a healthy financial system. This
is enough reason for the Parliament not to delay any further in adopting this
as part of the legislative framework.
– Sharada Krishnamurthy & Gokul Ashok Thampi
[1] http://www.oecd.org/regreform/sectors/financialconsumerprotection.htm.
[2] Clause 2(35), Code.
[3] Clause 2(76), Code.
[4] Clause 2(73), Code.
[5] Clause 105, Code.
[6] Clause 106(1)(a), Code.
[7] Clause 109, Code.
[8] Clause 109, Code.
[9] Clause 110, Code.
[10] Clause 112, Code.
[11] Clause 110, Code.
[12] Clause 112, Code.
[13] Clause 116, Code.
[14] Clause 136, Code.
[15] Clause 147, Code.
What happens in the case of Standard Form Contracts? Is the entire contract void unless it has been explained to the consumer/does the consumer have any leeway to modify the contract.
In standard form contracts, there is no option to the offeree to modify the contract, which is a unique feature about such contracts distinguishing them from other negotiated contracts. Under the Code, to establish unfairness of a contract, the considerations include, the consumer not being provided with the information in a language he understands, or, legibly and clearly, consumer not getting an opportunity to compare the said contract with contracts of similar nature, etc. The same considerations apply even in the case of a standard form contract to determine its fairness. Clause 109 embodies the tenets of unconscionability of contracts.
We hope this answers your query.
-Sharada and Gokul.