Context

Earlier this year, the G20/OECD released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection. As India takes over G20 presidency in December, it must lead others by example and adopt the revised principles, especially since the global financial markets are headed for a stormy future.

What is Financial Consumer Protection (FCP)?

Financial consumer protection encompasses the laws, regulations, and institutional arrangements that safeguard consumers in the financial marketplace. It includes technical guidance, country reports, and tools for policymakers, regulators, development partners and other experts.

10 thematic areas: 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.
Two additional principles included: In October, the fourth finance ministers and central bank governors meeting endorsed these principles. In 2022, two additional principles were included access and inclusion and quality financial products.
Recommendation for intervention: The updated principles also recommend intervention by regulators in certain high-risk products, cultivating appropriate firm culture and using behavioral insights to better consumer outcomes.
These principles deal with three cross-cutting themes

Individual financial well-being: 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.
Easy disclosure to consumers: 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.
Risk profiling by service provider: Regulators such as SEBI prescribe certain financial service providers to assess customer suitability and undertake risk profiling before providing services.
India does not recognize this theme: At present, India does not recognise this concept. Going forward, faced with challenges like financial illiteracy and economic hardship, it may be worth considering.

Increasing digital channels in financial domain: 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.
Guideline on digital lending by RBI: 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.
Poor grievance redressal: 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.

Multi-dimensional approach: 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.
Transparency is must: FCP recommends improved transparency to help consumers make informed choices.
BRSR by SEBI: SEBI has transitioned from “business responsibility reporting” to “business responsibility and sustainability reporting” (BRSR) to promote responsible corporate governance vis-à-vis climate change.
Mandatory disclosure by BRSR: Eligible companies under BRSR must provide certain disclosures, including a sustainability performance report. This allows investors to make an informed decision. Similar disclosures must be introduced in other market segments.

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.