Health Insurance Ownership in India
As part of the Notes on the Indian Financial System series, Deepti George, Dvara Research, has authored our latest research paper titled “Universal Conduct Obligations for Financial Services Providers Serving Retail Customers“.
By Deepti George, Dvara Research
Customer protection in financial services in India is the domain of respective product-specific regulators, namely the RBI, SEBI, IRDAI and PFRDA1. The frameworks for customer protection in financial products and services that exist today have been inadequate to protect the interests of households and enterprises. The design of the universe of customer-touch points for the sale of financial products has not sufficiently enhanced the abilities of customers to access unbiased advice and sales practices that keep their best interests in mind. While elements of financial advice are embedded in the sale process, regulators have kept these two offerings separate, and this has resulted in unintended negative consequences. Financial consumers have the freedom to move between institutions for their financial needs but are subjected to differential standards based on the institution-types they engage with. These issues get amplified further with the new waves of disruption happening in financial services and where the distinction between the distributor and the manufacturer is getting progressively blurred in terms of liability for harms and/or losses to the customer. These reasons make it imperative that financial customer protection in India needs a significantly different design and implementation strategy to what is present currently. In this paper, we articulated a set of recommendations that financial sector regulators can consider applying on regulated financial services providers in order to improve outcomes for households and enterprises.
We start by defining the ‘retail customer’ for financial services, in the interactions with whom, all financial services providers must ensure they are meeting certain conduct requirements as set out by the regulator, irrespective of their own legal form. In deciding these requirements, regulators need to shift to a regime that requires providers to exhibit a set of behaviours against a set of clearly articulated conduct obligations. The responsibility of interpreting these conduct obligations and adhering to them is to be placed on the provider to demonstrate through reasonable efforts.
We recommend that an additional obligation of suitability in distribution/sale be introduced on financial services providers in order to ensure that customers’ interests are adequately and effectively protected as a matter of business process. For this, the provider must invest in efforts that are proportionate to the complexity that the financial product or service can introduce in the financial life of the customer and the risk of harm to the customer, considering the nature of the customer, and the nature of the financial product or financial service provided.
We also recommend that all financial services providers must publish a board-approved policy and corresponding processes on how they intend to comply with these obligations. The governing boards of providers must take a proportionate approach, by considering the nature, scale and complexity of business while deciding these board-approved policies. These board-approved policies, along with their customer-facing practices are to be open to scrutiny by the regulator/supervisor.
We propose a set of universal conduct obligations in this note that reflect our recommendations.
Click here to read the paper.
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1 – The design of regulatory bodies that is product/function specific (as opposed to the twin-peaks model that splits regulatory bodies along the functions of prudential and market conduct) creates issues where certain products slip through gaps in the regulatory net. While the ideas articulated in this document cannot solve for these issues, the Financial Redress Agency can in its inter-regulatory role, serve as an effective plug for capturing such issues. This document also does not articulate solutions for better supervisory frameworks, but is intended as a starting point for moving towards better regulation and supervision. The twin-peaks model was first put forward by Micheal Taylor of the Centre for the Study of Financial innovation in 1995, and later adopted by Australia and other countries. Source: Taylor.M. (1995). “Twin Peaks: A Regulatory Structure for the New Century”, Centre for the Study of Financial Innovation. Available at: https://bit.ly/2vQKQnb
