Financial Consumer Protection (FCP)

In Context

• Recently, the OECD released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection (FCP).

More about the news

• OECD’s principles:
  • The OECD is working on how to enhance financial consumer protection, which includes determining what is required to help consumers gain the confidence, knowledge, information, security and choices they need to enable them to fully participate in financial markets.
  • OECD’s principles deal with three cross-cutting themes — financial well-being, digitalisation and sustainable finance. 
• OECD’s 2011 principles on FCP covered 10 thematic areas reflecting the 
  • Market and consumer issues, 
  • Equitable and fair consumer treatment, 
  • Disclosures and transparency, and 
  • Financial education. 
• In 2022, two additional principles were included: 
  • Access and inclusion and 
  • Quality financial products.
  • The updated principles also recommend 
    • Intervention by regulators in certain high risk products, 
    • Cultivating appropriate firm culture and 
    • Using behavioural insights to better consumer outcomes.

Significance of effective Financial Consumer Protection (FCP) in India

• Disclosures and transparency:
  • About:
    • An effective FCP regime must ensure adequate and easy to understand disclosures to consumers. 
  • For India:
    • However, an information dump for mere compliance defeats this purpose, especially in India where financial literacy is not pervasive. 
  • SEBI’s guidelines:
    • Therefore, regulators such as SEBI prescribe certain financial service providers to assess customer suitability and undertake risk profiling before providing services. 
  • Global practice:
    • Countries such as the UK and New Zealand have introduced guidance to identify and provide fair treatment to “vulnerable financial consumers”. 
    • At present, India does not recognise this concept. 
• Newer areas for intervention:
  • About:
    • FCP must consider the increasing number of digital channels consumers use to interact with financial products and services 
    • It should also consider the impact of greater use of artificial intelligence and other emerging technologies. 
  • For India:
    • With the rising number of UPI transactions and the largely unregulated status of cryptocurrencies, FCP will continue to be relevant.
  • RBI guidelines:
    • RBI released guidelines on digital lending, mandating entities providing digital lending services to have a grievance redress officer, assess a borrower’s creditworthiness before extending credit, and allow a borrower to exit without penalty. 
• Sustainability of financial investments:
  • About:
    • There is growing consumer demand for sustainable financial investments. 
    • Financial services providers are incorporating environmental, social and governance factors into their operations, products and services. 
    • FCP recommends improved transparency to help consumers make informed choices.
  • SEBI’s BRSR:
    • SEBI has transitioned from “business responsibility reporting” to “business responsibility and sustainability reporting” (BRSR) to promote responsible corporate governance vis-a-vis climate change. 
      • Eligible companies under BRSR must provide ESG related disclosures, including a sustainability performance report. 
      • This allows investors to make an informed decision. 
    • Similar disclosures must be introduced in other market segments.
• Greenwashing:
  • The 2022 draft also warns against “greenwashing”. 
    • This is aligned with an expert report presented at COP27. 
  • Financial regulators must monitor that Indian corporations are not misleading consumers with false claims regarding progress towards climate targets.

Way Ahead

• The current regulatory landscape is sectoral and fragmented, resulting in regulatory arbitrage, as witnessed in the case of digital gold. 
• Regulators must take a coordinated approach to protect consumers.

Source: IE