The Finance Ministry's FinTech report has recommended the formation of a new legal framework for consumer protection and has suggested enacting a law governing it soon. Although it did talk about consumer protection in the context of data privacy, it did not lay down concrete recommendations about how it would go about solving this issue. It also recommended amending the current Payments and Settlements Security (PSS) Act to include explicit mandates for consumer protection. Why consumer protection broke down While pointing towards consumer protection breakdown, the committee referred to cases such as- Bernie Madoff scam in the US, the Payment Protection Scandal in the UK, the Saradha chit fund scam in India. It also said that fintech raises further concerns over its implications on consumer protection and further talked about Ezubao P2P scam in China involving misdirected funds, and the GainBitcoin scam in India. It laid out three broad causes of consumer protection breakdown: Information asymmetry: Consumers don’t have sufficient knowledge to evaluate the products. Time-lag: There is no immediate feedback to the consumer on the quality of the financial product; the consumer only realizes its true features over several years. Incentive alignment: The sale of financial products happens through distributors, who are remunerated by the product manufacturers. Therefore, distributors work in the interest of the financial firm and not the customer, leading to misaligned incentives between the distributor and customer. Consumer protection problems can be addressed through: Ex-ante regulations: This includes regulating the sale process in order to facilitate informed decision-making by…
