Financial Consumer Protection (FCP)

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    In Context

    • Recently, the OECD released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection (FCP).

    More about the news

    • OECD’s principles:
      • The OECD is working on how to enhance financial consumer protection, which includes determining what is required to help consumers gain the confidence, knowledge, information, security and choices they need to enable them to fully participate in financial markets.
      • OECD’s principles deal with three cross-cutting themes — financial well-being, digitalisation and sustainable finance. 
    • OECD’s 2011 principles on FCP covered 10 thematic areas reflecting the 
      • Market and consumer issues, 
      • 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.

    About the Financial Market

    • About:
      • The Financial Market is a place where financial products and services are bought and sold on a regular basis.
        • It deals in the purchase and sale of different types of investments, financial services, loans, etc.
    • Financial markets in India:
      • There are two main types of financial markets in India where the majority of trading is happening. 
        • The first one is the money market and the second one is the capital market.
      • Banks and financial institutions are a part of the financial market.
    • Financial Consumer Protection (FCP):
      • Financial Consumer Protection (FCP) includes determining what is required to help consumers gain the confidence, knowledge, information, security and choices they need to enable them to fully participate in financial markets.
    • Need of FCP:
      • 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.

    Significance of effective Financial Consumer Protection (FCP) in India

    • Disclosures and transparency:
      • About:
        • An effective FCP regime must ensure adequate and easy to understand disclosures to consumers. 
      • For India:
        • However, an information dump for mere compliance defeats this purpose, especially in India where financial literacy is not pervasive. 
      • SEBI’s guidelines:
        • Therefore, regulators such as SEBI prescribe certain financial service providers to assess customer suitability and undertake risk profiling before providing services. 
      • Global practice:
        • 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. 
    • Newer areas for intervention:
      • About:
        • FCP must consider the increasing number of digital channels consumers use to interact with financial products and services 
        • It should also consider the impact of greater use of artificial intelligence and other emerging technologies. 
      • For India:
        • With the rising number of UPI transactions and the largely unregulated status of cryptocurrencies, FCP will continue to be relevant.
      • RBI guidelines:
        • 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. 
    • Sustainability of financial investments:
      • About:
        • 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’s BRSR:
        • 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.
    • Greenwashing:
      • 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.

    Way Ahead

    • 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.

    Organisation for Economic Co-operation and Development (OECD)

    • Foundation:
      • The forerunner of the OECD was the Organisation for European Economic Co-operation (OEEC), which was formed to administer American and Canadian aid under the Marshall Plan for the reconstruction of Europe after World War II.
      • The Convention transforming the OEEC into the OECD was signed at the Chateau de la Muette in Paris on 14 December 1960 and entered into force on 30 September 1961.
    • About:
      • It is a forum and its members are countries which describe themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members.
    • Economies:
      • The majority of OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries. 
    • Secretary-General:
      • The head of the OECD Secretariat and chair of the OECD Council is the Secretary-General.
      • Secretary-General selections are made by consensus, meaning all member states must agree on a candidate.
    • HQ: Paris, France
    • Members:
      • OECD has 38 member countries.
        • India:
          • India is not a member of OECD. 
          • Although, India is one of those non-member economies with which the OECD has working relationships in addition to its member countries.

     

    Securities and Exchange Board of India (SEBI):

    • About:
      • SEBI is a statutory body established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
    • Aim: 
      • To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
      • It is the regulator of the securities and commodity market in India owned by the Government of India.

    Source: IE

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