Being ‘Sachet’ in Curbing Illegal Money Deposits
Our earlier post covered the second approach to consumer protection that was discussed in the IFMR Financial Systems Design Conference 2012. This post carries details of the third session that discussed a framework for consumer protection based on the principle of ‘Suitability’.
Suitability is defined as the degree to which the product or service offered by the intermediary matches the retail client’s financial situation, investment objectives, level of risk tolerance, financial need, knowledge and experience .
This approach believes that that mandating increases in information disclosures alone will not lead to improved consumer outcomes in light of innovation in the financial sector and growing product complexity. In such an environment, imbalances in information, expertise and power between the buyer and seller will only increase with time. This approach believes that the most appropriate way to protect the welfare of the consumer would be to put the onus of consumer protection on the seller. The seller must be held accountable for the service provided to the buyer, by ascertaining that the products sold or the advice given is suitable for the buyer considering her needs (as determined by the buyer using its expert judgment).
Anand Sahasranaman of the IFMR Finance Foundation provided insights on the scope and rationale for Suitability; Suitability in the Indian context; the Australian experience of implementing suitability; and supervisory and enforcement options.
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Monika Halan, Editor of Mint Money provided insights from the market. Her presentation covered international experiences in different approaches to investor protection and emphasised on the need for introducing Suitability in India. She discussed the market structure required to clean up the system as preparation for Suitability. Two case studies (ULIPs and Mutual Funds) were discussed in detail as recent examples of how poor product structures and skewed incentives caused huge losses to Indian investors.
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