BCSBI CONFERENCE FOR
PRINCIPAL CODE COMPLIANCE OFFICERS
CONSUMER PROTECTION AND MARKET CONDUCT
REGULATION
K.C.CHAKRABARTY
Deputy Governor
Reserve Bank of India
APRIL 29, 2013
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Agenda
• Issues in Financial Consumer Protection
• Market Conduct – Regulatory and Consumer Protection
Concerns
• Customers’ Right to Fair Treatment
• Are customers being treated fairly? – some examples
• Implications of banks’ conduct on economic and social order
• Twin Peaks Model –Objectives, Global experience, India
• Conclusion
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FINANCIAL CONSUMER PROTECTION – ISSUES
Less
competition
due to stiff
entry barriers
Product
Proliferation due
to technology
enabled delivery
channels
Consumer
Protection
Low Levels of
Literacy
Large scale
Information
Asymmetry
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REGULATOR’S CONCERNS
• Mis-selling of products and services- Misleading
advertisements, unsolicited products, forced bundling
• Transparency and Disclosure – Complex terms and
conditions, Non-disclosure of penal provisions, hidden fees
and charges, usurious penal charges
• Consumer Education – Lack of awareness of MITCs, poor
customer responsibility
• Collecting Dues – Harassment/ Intimidation, conduct of
recovery agents
• No. of customers approaching BOs still high, indicating
inadequacy of banks’ internal redressal systems
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CHALLENGES & TRENDS IN CONSUMER
PROTECTION
• Product proliferation in the name of
innovation- Structured products, derivatives
• Increase in virtual and cross-border
transactions
• Imbalances in bargaining power
• Segregation of consumer protection and
market conduct issues from prudential
regulation
• Treating Customers Fairly (TCF)
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CONSUMERS’ RIGHT TO FAIR TREATMENT
• What is TCF
- Consumers understand the features, benefits, risks
and costs of products they buy and the services they use
- Transparent and non-discriminatory pricing
• TCF characteristics:
– access to adequate, comparable information
– honest and ethical dealings
– effective, responsive and robust grievance redressal
system
– appropriate advice on suitability of products
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REGULATORY FOCUS ON FAIR TREATMENT OF
CUSTOMERS THROUGH PRODUCT LIFE -CYCLE
• ACCURATE INFORMATION
• TRAINED STAFF
• NO MISLEADING ADVTS.
• SIMPLICITY
• FAIR CONTRACT TERMS
• PLAIN LANGUAGE
• TRANSPARENT & NON –
DISCRIMINATORY PRICING
• EASILY ACCESSIBLE
• OBJECTIVE TIME-LINES FOR
REDRESSAL
• INFORMATION ON
ALTERNATE DISPUTE
RESOLUTION MECHANISM
PRODUCT
DESIGN
MARKETING
AND
ADVERTISING
GRIEVANCES
REDRESSAL
AFTER SALES
SERVICE
• CONTINUOUS SUPPORT
TILL EXPIRY OF TERM
• PROMPT SETTLEMENT OF
DISPUTES
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ARE CONSUMERS BEING TREATED FAIRLY ?
• Bundling of insurance with bank’s regular products
• Perverse incentive structures encourage mis-selling-Sale
targets for front desk staff!
• Floating interest rates – Sticky on the downside !
• Wide variation in interest rates charged for retail loansCustomers discriminated in spite of similar risk profile
• Discrimination in rates offered to old and new customers
with identical risk profiles
• Discount on rate of interest charged during festivals
• Charges for not providing services
- Non-maintenance of minimum balance
- Charges for no transaction in accounts
- Prepayment penalty
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SOCIO- ECONOMIC FALLOUT OF IMPROPER
MARKET CONDUCT
• Banks might meet legal and regulatory prescriptions but whether their
market conduct is in tune with wider socio-economic interest
- Lending against the security of gold (why it should not be treated as
consumption loan)
- Opening of accounts of MLM companies and allowing transactions
• Cobrapost episode:
-Staff facilitating tax evasion through splitting of transactions
-Customers allotted multiple IDs, even within the same branch
- Laxity in CTR/STR reporting
- Sale of third party products/gold coins at branches – Without KYC
• Lack of follow up on export bills sent for collection – implications for CAD
• Large ‘unhedged forex exposures’ of corporates– implications for
individual banks and for systemic stability
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CASE FOR TWIN PEAKS REGULATORY
ARCHITECTURE
• Segregating prudential regulation from market
conduct regulation – Institutional solvency and
systemic stability does not ensure consumer
protection
• Growing recognition that institution-based structures
are becoming irrelevant
- Changes in industry characteristics
- Changes in product characteristics
• Neither institutional nor functional approaches
were/ are adequate
• Problem of scarce specialist skills – supervisory and
regulatory
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CHANGING PROFILE OF FINANCIAL SERVICES
INDUSTRY
• Emergence of financial conglomerates –
growing size and numbers
• Abolition of barriers/ restrictions on
investment/ commercial banking combinations
• Bank- insurance linkages becoming
commonplace
• Need for a “group-wide” perspective for
monitoring prudential soundness
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CHANGING PRODUCTS PROFILE
• New/ innovative products that overlap
conventional deposit/ insurance/ securities
boundaries
• Credit default swaps – are they exposure in
terms of credit or insurance ?
• Problems posed in the area of consumer
protection – who regulates which product ?
• Systemic issues – OTC derivative markets
increased the interconnectedness of institutions,
banks and non-banks
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TWIN PEAKS MODEL - OBJECTIVES
• Functional Specialization
• Optimum and efficient use of resources
• Ensuring accountability
• Avoiding comprehensive single point
regulatory lapses and systemic failures
• Standardized KYC requirements-Remove
irritation of multiple KYC requirements
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PRUDENTIAL REGULATION
• Objective - ensure safety and soundness of
individual entities and overall financial stability
(Systemic stability concerns)
• Focus on large financial entities including
financial conglomerates
• Tools used include stipulation of liquidity and
solvency requirements and regulation of the
payment system
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MARKET CONDUCT REGULATION
• How firms conduct their business, design and price their
products, treat their consumers
- Banks financing speculative products (Gold, Equity)
- Banks receiving commission/ fees from dealers/ suppliers
• Whether banks’ activities are in national/societal interests
• Objective is to secure consumer protection, improve
market confidence, promote access to financial services
and protect the system from financial crimes
• Tools include prescribing standards and codes, monitoring
performance against these codes
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CROSS COUNTRY EXPERIENCE
• Early Proponents : Australia (1997)- APRA as
prudential regulator and Australian Securities &
Investment Commission as market conduct
regulator; Netherlands (2002)
• UK moved to twin peaks model on April 1, 2013 with
creation of separate Prudential Regulatory Authority
and Financial Conduct Authority for market conduct
• Several European nations such as Belgium, France,
Portugal, Italy, etc. moved to twin peaks architecture
in some form
• Both Australia and Netherlands relatively less
affected by the financial crisis.
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TWIN PEAKS MODEL IN INDIAN CONTEXT
• Multiplicity of functional regulators(RBI, SEBI, IRDA,
PFRDA) with diverse objectives
• RBI, SEBI, IRDA and PFRDA have entered into a MOU
for better monitoring of FCs –More of a financial
stability objective
• Other agencies like MCA, BCSBI, Consumer and civil
courts also exist – Consumer protection and fair
market conduct have remained peripheral agenda
• Separate regulator could increase compliance
burden on banks and increase compliance costs.
• Higher costs could impact financial inclusion efforts
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EXPECTATIONS FROM BANKS/PCCOs
• Some concerns expressed during last PCCO
Conference still very pertinent- faulty
incentive models for selling insurance/MF
products, vulnerability of customers' rights in
electronic banking transactions, etc.
• Banks to go beyond the BCSBI mandated
Codes and develop their own Code of Conduct
• Self-regulation by institutions necessary so as
to avoid stringent regulation
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CONCLUSION
• Fair Treatment to Consumers not ingrained in the ethics
and culture of financial institutions in India
• Conduct of banks not in the best of economic and societal
interests
• Need to nurture a culture of fair treatment to customers –
A Board/Top Management driven change in outlook
necessary – If customers are not happy, institutions can’t
survive
• Need to recognize that market conduct and consumer
protection essential for financial stability as well - Banks
have to act as agents of change – for ending the social
divide and discrimination against the poor and the
vulnerable sections
• BCSBI and the PCCOs have an important role to play
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CONCLUSION.. .contd.
• Following the Crisis, conduct of financial
institutions is under increased social scrutiny
• If banks are not customer centric, society will
demand change to a twin peaks approach
leading to greater compliance burden and costs
• Hence, it is in banks’ own interests to
demonstrably prove their concern for the
consumers and the society through fair
treatment to consumers and efficient market
conduct.
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THANK YOU
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