By Anand Sahasranaman, Deepti George, Darshana Rajendran & Vishnu Prasad, IFMR Finance Foundation
The financial crisis of 2008 brought to light many consumer abuses prevalent in the financial services industry. As a response to the crisis, countries across the world have been re-designing their legal and regulatory architectures to better protect financial consumers and contain systemic risk. The United States, for instance, has passed the Dodd-Frank bill into law, leading to the creation of the Consumer Financial Protection Bureau (CFPB). The United Kingdom has changed its regulatory architecture, creating separate regulators for prudential regulation and market conduct (or consumer protection). Australia and the Netherlands already have separate market conduct regulators, and South Africa has indicated that it will soon follow suit.
India is also undertaking a fundamental review of its financial sector legislation, with the creation of the Financial Sector Legislative Reforms Commission (FSLRC), whose mandate is to rewrite and harmonise all financial sector laws. In this context, we feel that this is the appropriate time to re-think the framework for consumer protection in finance in India and arrive at an understanding of the fundamental philosophies that should underpin such a framework. In this paper, we propose a fundamentally new basis for financial consumer protection in India.
We begin with an analysis of the theory of consumer protection and follow it up with a discussion on the special case of the financial consumer. We then take a step back and analyse the functions of finance and the role of finance in the life of households. We use real-life case studies to illustrate the capacity of the Indian financial marketplace to fulfil financial needs of households today and also discuss some critical national socio-economic trends in India that the financial system needs to be equipped to respond to effectively. Following from this, we assess the future of finance in India, to come to an understanding of the nature of the financial system that must be created in India to ensure financial inclusion as well as systemic stability. Finally, with the theoretical basis as well as the Indian context firmly in place, we develop the fundamental philosophies around which the framework for consumer protection in finance should be built.