Date: 21/11/2022

Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Principles on Financial Consumer Protection (FCP), Organisation for Economic Co-operation and Development( OECD), Business Responsibility and Sustainability Reporting (BRSR), Securities and Exchange Board of India (SEBI), Greenwashing, Securities Appellate Tribunal (SAT)

Context:

• Recently the Organisation for Economic Co-operation and Development (OECD) released a draft of the proposed revisions to their 2011 High-level Principles on Financial Consumer Protection (FCP).

Background:

• In October, the fourth finance ministers and central bank governors meeting endorsed Principles on Financial Consumer Protection.
• 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
  • Digitalization
  • Sustainable finance.

The Financial Consumer Protection (FCP) landscape

• 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.
  • Information dump for mere compliance should be avoided because in India where financial literacy is not pervasive, this defeats the intended purpose.
  • 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”.
• Increased digitization
  • The 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.
  • Concerns regarding redress of grievances against payment service providers in the UPI ecosystem can be addressed.
  • With the rising number of UPI transactions and the largely unregulated status of cryptocurrencies, FCP will continue to be relevant.
• Sustainable financial investments
  • 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.
• Against Greenwashing
  • The 2022 draft of the FCP also warns against “greenwashing”.
  • This is aligned with an expert report presented at COP27.

Domestic initiatives for a protecting financial consumers

• RBI guidelines on digital lending
  • In September, the RBI released guidelines on digital lending which mandates entities providing digital lending services-
    • To have a grievance redress officer.
    • Assess a borrower’s creditworthiness before extending credit.
    • Allow a borrower to exit without penalty.
  • This is a promising move as it recognizes suitability assessment and provides a cooling-off period, which are critical to protecting consumers.
• SEBI’s Business Responsibility and Sustainability Reporting(BRSR)
  • SEBI has transitioned to “Business Responsibility and Sustainability Reporting” 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.

Way ahead

• Customer stability and consumer profiling for financial well-being should be a good move going forward because it will be a game changer for the Indian financial ecosystem faced with challenges like financial illiteracy and economic hardship.
• Financial regulators must monitor that Indian corporations are not misleading consumers with false claims regarding progress towards climate targets.
• Disclosure initiatives such as BRSR of SEBI must be introduced in other market segments.

Conclusion

• The RBI’s financial inclusion index shows that an increasing number of people are entering financial markets.
• The current regulatory landscape in India is sectoral and fragmented, resulting in regulatory arbitrage and in such scenarios the FCP could be a potential solution to ensure a sound financial ecosystem therefore the regulators must take a coordinated approach to protect consumers.

Source: Indian Express

Mains Question:

Q. In the current age of digitalization OECD’s Principles on Financial Consumer Protection (FCP) could be a readymade solution for India’s financial ecosystem which is plagued with challenges like digital financial illiteracy and economic hardship at grassroots, Critically analyze(250 words)