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 the customer. The tools of regulation include demanding clear disclosures and caps on commissions to bring greater incentive alignment between the distributor and the customer’s interests.
- Ex-post regulations: This includes establishing redressal for consumer grievances against sales. Enforcement against errant product manufacturers or sellers would be integral to such a system.
While addressing the issues related to data privacy among consumers, the committee pointed out the ‘High-level Principles’ on financial consumer protection which were endorsed by the G20 Finance Ministers and Central Bank Governors in 2011. It suggested that consumers’ financial and personal information should be protected through appropriate protection mechanisms, and these mechanisms should also define the purposes of data collection, processing, held, used and disclosed (especially to third parties).
Recommendations for consumer protection
- Consumer Protection framework: The committee recommended the formation of a new legal framework for consumer protection while keeping in mind the potential rise of fintech and digital services, and recommended enacting a law to this effect soon.
- Amending the PSS Act: Amending the PSS Act to include explicit mandates for competition and innovation, open access and interoperability, consumer protection, regulations on systemic risk, data protection and security