Subsequent to our earlier post that briefly laid out the three approaches to consumer protection that were discussed in the IFMR Financial Systems Design Conference 2012, upcoming posts in this series will take you through these sessions in detail.
The first session discussed a framework for consumer protection based on information disclosure.
“Disclosure” refers to any requirement that the firm disclose information to the retail client that could be material to the investment decision . Consumers of financial services have less information and sophistication about the financial system and financial services than the financial services providers. The imbalance of information leads to consumers being vulnerable to abusive practices. Disclosure is seen as a way to handle this information gap between the providers and the customers by providing as much information as possible in an understandable way to the customer. Information disclosure pertains to product terms including pricing, risk factors, and provider conflicts of interest. Plugging these information gaps is viewed as being critical to promote good consumer choices.
Recent research has pointed out the limitations of a disclosure based approach and also addressed the issue of more effective disclosure mechanisms. This approach believes that well-designed disclosures complemented by effective financial literacy programs enable consumers to make better decisions and improve their financial outcomes.
The first speaker for the session, Kate McKee, Senior Advisor at the Consultative Group to Assist the Poor (CGAP) provided research based insights on information disclosures in finance. Her presentation covered the scope, components and the importance of information disclosures, international trends in disclosure regime, limitations of the disclosure regime and policy considerations in implementing this regime.
The next speaker Veena Mankar, Managing Director of Swadhaar FinServe provided a real world experience-based perspective on the use of information disclosures. Her presentation covered practical experience of implementing this regime in low income segments, concepts of customer profiling and matching disclosures, financial literacy as a component of disclosure and a view for the future of disclosure in India.