India’s financial regulators must become proactive enforcers of consumer protection

The recent remarks by Reserve Bank of India (RBI) Deputy Governor Swaminathan J at the conference on customer service serve as a stark reminder of the urgent need for a radical shift in the approach of Indian financial institutions towards consumer protection.

Banks and other financial institutions are not merely profit-driven entities; they are pillars of trust upon which a nation's financial stability relies. However, in their pursuit of profit, many have lost sight of their fundamental promise — to protect the trust consumers place in them. Mis-selling has run rampant for years now, with banks functioning more like distribution engines for non-core, non-banking financial products. Regulators are aware of these issues, but mere perfunctory statements won't suffice to rectify the deeply ingrained culture of poor behaviour.

The lending sector needs to demonstrate tangible improvements. This includes providing clearer product explanations, simplifying offerings, and establishing standardised procedures for resolving consumer grievances promptly. It's essential to rebuild consumer trust, eroded over years of questionable practices. With financial literacy, and awareness about consumer rights relegated to the annual literacy week, and posters at obscure places at branches, one wonders why can’t financial regulators adopt new-age communication channels, and ensure their industry participants participate in their brand campaigns.

On the other hand, the Insurance Regulatory and Development Authority of India (IRDAI) faces an even more significant challenge. The insurance sector remains a hotbed of consumer complaints, with low consumer trust levels. Health insurance, in particular, is marred by a lack of confidence, with consumers feeling like outsiders.

The insurance industry's primary duty is to promptly honour claims. However, the sector's behaviour appears rooted in distrust towards consumers when claims are made. The IRDAI must radically transform this industry's premise — it exists to fulfil claims, not to perceive every claimant as a potential threat to its bottom line.

It's evident that both the banking and insurance sectors have deviated from their core missions. Banks, originally meant for lending and safeguarding public deposits, have wandered into the labyrinth of financial product distribution. Similarly, the insurance industry, entrusted with protecting individuals and families, has become overly focused on selling investment products.

The effectiveness of regulatory bodies hinges on their awareness of consumer complaints. However, for regulators to be well-informed, it is imperative that consumers find it easy to voice their concerns and trust that their grievances will be addressed in a timely manner. Without a streamlined and trustworthy complaints system, consumers may hesitate to come forward, leaving countless issues unreported and unresolved.

What if regulations mandated the inclusion of sectoral grievance redress mechanisms and contact details in every product package and service documentation, akin to the statutory warnings on cigarette packs? Imagine the heightened consumer confidence that would result in. Picture this: after purchasing a product or service, every consumer receives an automated SMS or email from the sectoral regulator or ombudsperson, complete with a digital link to submit complaints if needed. Alternatively, consider a barcode or bit.ly link accompanying each financial transaction via an email or SMS, seamlessly linked to the regulator's consumer grievance portal, pre-filled with relevant consumer and product information. Consumers would then only need to clarify the nature of their complaint, simplifying a process that currently discourages many from seeking recourse. Such proactive measures could revolutionise consumer protection in the financial sector.

It is imperative that Indian financial regulators demonstrate their unwavering commitment to consumer protection by imposing substantially increased financial penalties for any lapses or significant consumer grievances. The current practice of levying fines that often amount to less than the hourly fees of a skilled lawyer to read the regulatory penalty letter is far from sufficient. Regulators must recognise that meaningful penalties not only serve as deterrents, but also underscore their own dedication to safeguarding consumers' interests.

It's high time that Indian regulators take decisive action to prioritise consumer protection. This can begin by mandating that each Regulated Entity (RE) publicly publishes monthly updates on the complaints received and resolved on their website, and any public communication they do. Transparency and accountability must become the norm, not the exception. When the consequences of misconduct carry real financial weight, financial institutions are incentivised to prioritise compliance and consumer welfare, aligning with the regulators' mission to ensure a fair and secure financial environment for all.

Indian financial regulators must evolve from being passive observers to proactive enforcers of consumer protection. When will they?

(Srinath Sridharan is an author, policy researcher and corporate adviser. Twitter: @ssmumbai.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.