By Madhu Srinivas, IFMR Finance Foundation
Following our initial post on a brief comparison of grievance redressal mechanisms existing in India for financial services, at first glance it can be seen that there is considerable variation in the process elements among the various sector ombudsmen. This is indicative of varying processes, approach and service levels of the redress mechanisms. Let us delve on some common observations we made from the comparisons.
Recognition of Misselling, or a lack thereof
The Report of the Governing Body of Insurance Council (GBIC) has made the following observation in its analysis of the complaints received against Life Insurers – “In most cases of mis-selling the financial underwriting rules have been disregarded by the underwriter. So mis-selling which could have been arrested at the underwriting stage instead gets an impetus when the underwriter clears long premium paying term plans even though the proposer does not have the paying capacity to maintain the policy beyond the initial first payment.”
Our cursory analysis in the previous blog post reveals that there is no recognition of unsuitable sale as a separate category of complaints (beyond process-level complaints). Current supervisory mechanisms also have minimal efforts directed towards systematic detection of conduct violations on a regular manner, such as for violations of affordability assessments across all lending channels, and if such efforts exist, they are not placed proactively by the supervisor in the public domain. There is therefore a systematic under-representation of, and a lack of adequate evidence on the extent of unsuitable sale to households occurring in today’s context (products being unsuited to client needs, unfair contract terms, misleading conduct and market practices of intermediaries and so on). There is inadequate information about ‘misconduct’ practices feeding back to regulators and supervisors providing no respite for consumers even in the longer run. This would substantially underestimate the occurrence of, and the costs to customers on being mis-sold unsuitable products, and consequently reduce the impetus for regulatory action on the same.
Feedback Loops into Regulation and Supervision
The grievance redressal function can act as a powerful feedback loop to the regulator and can inform their regulatory and supervisory approaches as well as actions. We cannot definitively conclude whether regular feedback loops exist and if they do, whether regulators take these as inputs into supervisory processes, and further into updations in regulations (simply because these are not available in the public domain).
However, we looked at requirements placed in the respective Ombudsmen Schemes to see if such requirements are there on paper atleast. We found the following requirements which we think are inadequate for the purpose:
- From the Banking Ombudsman Scheme “The Banking Ombudsman shall send to the Governor, Reserve Bank, a report, as on 30th June every year, containing a general review of the activities of his Office during the preceding financial year and shall furnish such other information as the Reserve Bank may direct and the Reserve Bank may, if it considers necessary in the public interest so to do, publish the report and the information received from the Banking Ombudsman in such consolidated form or otherwise as it deems fit.”
- The Governing Body of Insurance Council (GBIC) has been established under Redressal of Public Grievances Rules 1998 (RPG), to set-up and facilitate the Institution of Insurance Ombudsman in India. From the RPG “The Ombudsman shall furnish a report every year containing a general review of the activities of the office of the Ombudsman during preceding financial year to the Central Government and such other information as may be considered necessary by it. In the Annual Report, the Ombudsman will make an annual review of the quality of services rendered by the insurer and make recommendations to improve these services.” 
The Report of the FRA Task Force points out that “a large number of complaints on a particular issue (for example, misselling in Unit Linked Insurance Plans (ULIP) resulted in consumers losing more than a trillion rupees over the 2005-2012 period) reﬂect regulatory and supervisory gaps, creating a conﬂict of interest unless feedback from complaints ﬂows to the regulator through an independent mechanism.” It has recommended the requirement for a research team under the proposed FRA to analyse complaints data and provide feedback to the regulator on areas for improvement in regulation or supervision. We can therefore conclude that such feedback loops do not exist currently.
Powers of ombudsmen/regulators to take action against non-compliant providers
There seems to be a patchy framework around powers of ombudsmen and even the regulators to take action against financial services providers who do not comply with an award made by the Ombudsmen.
|RBI / Banking Ombudsman||Section 35A(1) of Banking Regulation Act, 1949, empowers the RBI to give directions to the banking company, where it is satisﬁed that such directions
– are in the interests of public
– are in the interests of the banking policy
– are to prevent the aﬀairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company;
The banking company is bound to comply with such directions.
|SEBI SCORES||In case of non-redress of a grievance by an intermediary after having being called upon by the SEBI Board in writing to redress the grievances of investors, then such an intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees|
|IRDAI / Insurance Ombudsman||The GBIC cannot penalise Insurance companies for not complying with the award given by it.
Currently, there are no penal provisions available in the RPG for the non-implementation of the award passed by Insurance Ombudsman. Section 16(2) of the RPG provides that the Ombudsman cannot award compensation for an amount exceeding twenty lakh rupees. The compensation cannot exceed the amount that covers the loss suﬀered by the complainant as a direct consequence of the insured peril. 
Unregulated, unlicensed or illegal services
The current redress mechanisms do not admit complaints arising from unregulated, unlicensed or illegal services. The only recourse left to victims in such cases is to approach the police and the courts. This is a big lacuna in the redressal mechanism and it needs addressing. One of the more recent attempts to fill this lacuna is RBI’s Sachet initiative.
To sum up, it is clear that there is significant variation among the grievance redressal mechanisms in place for the Banking, Insurance, Pensions and Capital Market sectors. There is a very strong case to be made for the creation of the Financial Redress Agency (FRA) as the single agency that can act on behalf of aggrieved customers – an idea that is not new and one that has been effectively set up and is running in many other jurisdictions.
 Pg 33 Consolidated Annual Report of the office of the Governing Body of Insurance Council (GBIC), 2015-16
 https://www.dvara.com/blog/2017/04/10/a-brief-comparison-of-ombudsmen-frameworks-part-1/; https://ajayshahblog.blogspot.in/2017/01/establishing-financial-redress-agency.html
 Pg 10, Report of the Task Force on Financial Redress Agency, Government of India, June 2016
 Pg 15, Report of the Task Force on Financial Redress Agency, Government of India June 2016
 Pg 142 Report of the Task Force on Financial Redress Agency, Government of India June 2016
 See Section 15C of Securities and Exchange Board of India Act, 1992
 See Page 32 of the GBIC, Consolidated Annual Report of the Governing Body of Insurance Council & Oﬃces of the Insurance Ombudsmen for the year 2014-15. Also, See Pg 143, Report of the Task Force on Financial Redress Agency, Government of India, June 2016