Q: Where has the ‘consumer protection function’ predominantly been placed? In developing countries, have we reached a stage where this function has indeed been carved out as a separate function and/or under a separate regulator? Or does this continue to be under the prudential regulators, as is the case currently in India?
For developing countries, the number one priority is to get some basic consumer protection measures in place. At this point, the most pragmatic option appears to be to put this mandate in the prudential supervisor. At the “getting started” stage, there are strong advantages to leveraging the expertise, resources, reputation, and clout of the Central Bank or other such entity(ies). The pluses are even greater when the entity(ies) has broad scope and coverage, that is, the authority to set rules for a range of financial institutions beyond banks, such as MFIs and other lenders and sometimes financial co-operatives, insurers, or even capital markets players. (As noted, the alternative of charging general consumer protection or competition authorities with protecting financial consumers where this is only one small part of their mandate, has generally not been very successful.)
The end state we want is for a consumer that uses a product (such as a small, unsecured loan) to receive equal protection whether they borrow from a bank or any other provider. Ideally, market conduct rules should be organized by service rather than by provider. This might argue for creation of specialised market conduct regulators with authority over the whole financial market (the “twin peaks” model) or over all providers of a given service (such as the South Africa National Credit Regulator), whenever feasible. Separating oversight of prudential and market conduct matters also helps address potential conflicts of interest between the two domains. As a practical matter, however, such bodies are very rare in developed countries and virtually non-existent in developing countries. Creating one takes considerable political will, time, and resources. In most countries, the Central Bank or other sector regulators are the most pragmatic option for starting a financial consumer protection regime and building it over time.
So the next question is how to organize this function within the supervisory body, including whether it should be relatively more integrated with prudential oversight or independent from it. In fact, typically prudential supervisors are already monitoring some aspects of market conduct or enforcing some rules or guidance that protect consumers. When regulation creates additional market conduct rules or principles more incrementally, at some point the decision may be taken to make this a specialized function with a dedicated small team that might eventually grow into a unit with more resources and independence. A country that enacts laws creating a more comprehensive financial consumer protection framework might opt to create a specialised team, division or department at that point. Over time, more enforcement powers and tools might also be required. No matter the set-up, it is essential to create appropriate coordination and communication with the prudential function (and with the general consumer protection body, when such an authority exists); in cases like India where there are multiple sector regulators, coordination mechanisms are also highly advisable to ensure consistency and harmonization of rules and enforcement over time.
The problem of patchy coverage is vexing and particularly problematic from an equity and inclusion perspective, since poorer and more vulnerable consumers are the least likely to use those providers such as banks that operate under more market conduct oversight. In India and many other countries, if they use formal services at all, their service providers are more likely to be financial cooperatives, MFIs, or money lenders and other consumer lenders. This is a huge policy challenge in almost any market: how do you achieve enough coverage that low income consumers, for the products they use, really have some measure of protection that is comparable to that of better-off consumers. Creating a more level playing field is important for inclusion. This constitutes one of the strongest rationales for creating specialised market conduct supervisors.
Q: In the fragmented system, certain products that fall under the mandate of more than one regulator, actually slip through, as there is confusion on which regulator is responsible for its consumer protection.
The jurisdiction and coordination challenges can indeed be huge. As noted, while coordination is helpful it cannot always solve gaps in consumer protection coverage or effectiveness. One relatively common case is where the Central Bank of a country has oversight over banks and deposit-taking MFIs but not financial cooperatives. Even if the Central Bank and the entity that supervises cooperatives have the exact same rules for disclosure or grievance redressal, it is rather unlikely that the latter would have the resources and expertise to enforce them as well as the former. This is a dilemma that needs to be worked on over time.
Q: In terms of India, what has the general trend been, in terms of how much freedom do providers have to present new products, and what do you think India should be doing?
The current landscape of financial consumer protection in India is one that shares responsibility among multiple sectoral financial regulators, supplemented by some general consumer protection and institutions such as Ombuds (although only in certain sectors). The result is rather a patchwork. The work underway now to explore creation of a more comprehensive framework offers an important avenue for filling in gaps, expanding effective coverage, and ensuring more consistent protection of financial consumers. In the meantime, regulation needs to continue to evolve to permit continued innovation and advances in financial inclusion. Improving the effective implementation of existing rules and mechanisms in key areas such as disclosure, business conduct, and grievance redressal will benefit from consumer research and an ongoing process of consultation with industry, design and testing of more effective measures, and monitoring the market for new risks.
Your question as to whether the regulatory framework has given providers enough freedom to innovate is a difficult one. Obviously the financial regulation and supervision system in India is both very large and quite complex, with many actors. The market is developing at a rapid pace. It is not surprising that there are some rub spots, where rules might have been put in place that were too cautious or conservative and slowed the pace of responsible innovation. In such a large, diverse, and fast-paced market, it would not surprise me if there were not some areas where consumers are at risk and no one is paying enough attention. Getting the balance right is not easy. But Indian regulators have also demonstrated an ability and willingness to respond to these challenges, revisit their assessment of risks, and permit the rules to evolve over time. I am pretty confident that this will be the case as efforts are made to create a more robust but flexible and inclusion-friendly framework to protect financial consumers in India.