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Earlier this year,the G20/OECD released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection (FCP). In October, the fourth finance ministers and central bank governors meeting endorsed these principles. The 2011 principles covered 10 thematic areas reflecting the market and consumer issues, including 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.
These principles deal with three cross-cutting themes — financial well-being, digitalisation and sustainable finance. We focus on these themes as this approach has been used by the G20/OECD for the first time for FCP. First, FCP policies must contribute to overall financial well-being and resilience of consumers. OECD’s working definition of “individual financial well-being” refers to being in control, feeling secure and having freedom about one’s own current and future finances. An effective FCP regime must ensure adequate and easy to understand disclosures to consumers. However, an information dump for mere compliance defeats this purpose, especially in India where financial literacy is not pervasive. Therefore, regulators such as SEBI prescribe certain financial service providers to assess customer suitability and undertake risk profiling before providing services. 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. Going forward, faced with challenges like financial illiteracy and economic hardship, it may be worth considering.
Second, FCP must factor in the increasing number of digital channels consumers use to interact with financial products and services and the impact of greater use of artificial intelligence and other emerging technologies. In September, the 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. This is a promising move as it recognises suitability assessment and provides a cooling-off period, which are critical to protecting consumers. Additionally, there are concerns regarding redress of grievances against payment service providers in the UPI ecosystem. With the rising number of UPI transactions and the largely unregulated status of cryptocurrencies, FCP will continue to be relevant.
Third, 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 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.
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.
The RBI’s financial inclusion index shows that an increasing number of people are entering financial markets. FCP is central to ensuring that they continue to stay. 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.
The writers are consultants at NIPFP. Views are personal
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