INTRODUCTION

This paper primarily deals with the consumer protection in the financial services sector through a comparative study of the consumer protection mechanisms in Australia and India.

It is trite knowledge that financial products have permeated every household and business, and, in fact, it is peculiar to not have at least a deposit or savings account with a financial institute. This permeation has not only led to the advancement of the economy, in terms of provision of lines of credit to persons who required immediate funds, but has also simultaneously resulted in the evolution of increasingly sophisticated financial products, such as derivatives or mutual funds.

The high dependency on financial products and, conversely the financial institutes and advisors, makes the regulation of financial services and service providers all the more important. Regulation is required not only in terms of the financial products and risk management, i.e. prudential regulation, but is also required to regulate how the service providers market and manage the products in relation to the consumers, whether such consumers are informed financial investors or households and smaller businesses.

Ten years after the Global Financial Crisis (‘GFC’), most countries today have established reliable mechanisms in terms of the legislations, regulatory authorities and forums for dispute resolution for the purposes of ensuring consumer protection. Although there is no definition of a good consumer protection law, and, even within the international arena there is no consensus on a single method of regulating consumer protection in terms of financial services, the World Bank Group and the Consumers International have attempted to arrive at a list of best or good practices that may be followed.

In light of the above publications and keeping in mind the recent changes in the financial sector in terms of the digital advancement and increased financial inclusion, this paper seeks to undertake a fresh consideration into the consumer protection laws akin to a health check of where Australia and India stand today. The prime focus of this paper would be the new Consumer Protection Act, 2019, (‘the Indian Consumer Act’) passed by the Indian Parliament and the analysis of the same in light of the corpus of the comparable law in Australia as well as certain basic standards set down by the World Bank.

This paper would seek to examine, understand and compare the modus operandi of financial consumer protection in Australia and India on the following parameters:

1. Concept of a financial consumer
2. The relevant legislations that govern consumer protection
3. The bodies or institutions empowered to enforce consumer protective measures
4. Challenges, criticisms and possible changes

For housekeeping purposes, the term ‘consumer’ in this paper will be used to denote only individual or microentrepreneur recipients of financial services, unless otherwise mentioned. Corporations, in as much as they represent sophisticated recipients of financial services, will not be included in the understanding of the term ‘consumer’ as it is used in this paper. The term will be differentiated from a formal definition of a ‘financial consumer’ where such term has been legislatively defined.

The United Nations Conference on Trade and Development is undertaking a research project on the ‘Financial Consumer Protection in the Banking Sector: A Comparative and Empirical Approach’ which project is still in its nascent stage, i.e. Phase 1 wherein the research team is currently collecting data on the legal and regulatory frameworks of various countries. The primary aspects which this project will seek to analyse is inclusivity, transparency, financial literacy, sustainability of finance and redressal mechanism present in different countries. The objective of the research project seems to be finding the balance in the trade-off between protection of unsophisticated consumers, primarily rural consumers in developing countries, and the benefit to the economy from increased credit and minimal regulations.

At present there is the Good Practices for Financial Consumer Protection Report (‘the Report’) published by the World Bank Group in 2017, which is intended to serve as a point of reference in order to compare the existing consumer protection laws with what may be considered a near-ideal set of practices for the protection of consumers in the financial sector. Thus, this paper will use the standard understanding of the good practices as reported by the World Bank Group, in order to establish a baseline comparable for the discussions in the following chapters.

The Report discusses the financial consumer framework in a sector-wise manner, i.e. Deposit and Credit Products and Services are dealt with in Chapter 1, Insurance in Chapter 2 and so on. Within this paper, the standards themselves are:

1. Legal and supervisory framework;
2. Transparency and disclosure;
3. Fair treatment and business conduct;
4. Data protection and privacy; and
5. Dispute resolution mechanism.

This paper will discuss each of the above standards in the following chapter with one chapter dedicated to discussing one standard, therefore, Chapter 1 will deal with the legal and supervisory framework; Chapter 2 with transparency and disclosure; Chapter 3 with fair treatment and business conduct; Chapter 4 with data protection and privacy and Chapter 5 with the dispute resolution mechanism.

The Australian law that would be highlighted herein will deal with the legislations, the functions of the Australian Securities and Investments Commissions (‘ASIC’) and the Australian Competition and Consumer Commission (‘ACCC’), the common law in terms of the cases with a brief note on the new Banking Code of Practice published by the Australian Banking Association.

Similarly, the chapters will deal with the Indian legislations, functions of the Indian bodies and introduce the Indian Consumer Act and how it compares to the standards set internationally and by the Australian law.

The conclusion will sum up the views of the author in this paper.

CHAPTER 1: LEGAL AND SUPERVISORY FRAMEWORK

1.Legal Framework:

Expectedly, the World Bank prescribes that there needs to be an unambiguous, comprehensive and all-encompassing regulatory framework which covers all the financial service providers. The Report discusses two approaches which countries follow in respect of their legal framework:

1. General legislative and regulatory framework in relation to consumer protection that encompasses all the goods and services sectors. India, as will be discussed later in this paper, has a general legislation for consumer protection, as do Canada, Colombia, Mexico and Peru; and
2. Specific legislations with regard to financial consumer protection. Australia, Ghana, South Africa, United Kingdom and the United States have specific legislations with respect to financial consumer protection.

The above two approaches to consumer protection are typically vanilla and no jurisdiction strictly follows either, and in fact, at least 69% of the countries adopt a plethora of permutations and combinations of the above two approaches. The World Bank Report on Global Financial Inclusion and Consumer Protection Survey lists the different combinations as follows:

1. Standalone financial consumer protection law;
2. Consumer protection provisions within other financial sector laws;
3. General consumer protection law with explicit reference to financial services;
4. General consumer protection law with no explicit reference to financial services; and
5. No legal framework for financial consumer protection.

Although neither approach is stated as preferred in the Report, the pitfalls of a general legislation have been highlighted as follows:

1. General legislations do not usually bestow powers on financial regulators to further issue specific regulations to govern the financial consumers;
2. These legislations typically are applicable to only the formal financial sector, being the financial service providers who have been registered with an authority. This leaves a gap of those service providers who are not required to be registered with the authorities for provision of financial services. The rise in the diversity of financial activities from traditional banks to other, differently incorporated players, is of specific concern in the Report since the services provided by these entities would not be covered within the scope of a generic consumer protection framework.

The Report, in relation to the deposit and credit product services, emphasises the importance of adapting the existing legal framework to what it calls the ‘emerging realities of digital financial services’. As will be discussed later in this paper, one of the primary factors compelling the adoption of a new consumer protection law in India was to include within its ambit services and products offered digitally.

Licensing and registration are important aspects of having a comprehensive regulatory framework. The Report puts forth the proposition that it is easier for authorities or financial regulators to impose standards of practice on registered or licensed financial service providers, and conversely impose penalties, and make consumer rights protection an essential prerequisite to obtaining license or registration. This approach would not only lead to formalising the financial sector but would also increase the consumers’ trust in the formalised sector. The Report suggested a tiered method for introducing licensing requirements on the basis of the size and activities of the financial service providers so as to not unduly impose a burden on the smaller to mid-sized service providers, such as Microfinance Institutes, as is followed in Cambodia and Uganda.

The Report puts forth the requirement of an internationally accepted model law, although the same is not yet in existence, but it also highlights the need to modify any such model law to the milieu of a country before adoption of the law.

In Australia, there is a set framework for the protection of financial consumers. The Australian Securities and Investments Commission Act, 2001 (Cth) (‘the ASIC Act’), which houses the specific legislation in relation to consumer protection, defines a consumer in Section 12BC to mean a person who satisfies the following conditions:

1. The price of financial services received does not exceed 40,000 Australian Dollars (‘AUD’);
2. Should the price exceed the above limit, the nature of the services received are of the kind that are

1. Ordinarily required for personal, domestic or household use or consumption; or
2. Ordinarily required for use or consumption in relation to a small business.

Within the provision, a small business has been stated to mean one that employs 100 people in case of a manufacturing unit, and 20 people in all other cases. To alienate any ambiguity, the provision stipulates rules to determine the cost of the services rendered or received in order to determine whether or not the recipient of the financial services would be considered a ‘consumer’ and thus be protected under the ASIC Act.

Whereas, in India, the legislation for the protection of financial consumers is more of a general nature. Section 2(7)(ii) of the Indian Consumer Act, defines a consumer as any person who “hires or avails of any service for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such service other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person, but does not include a person who avails of such service for any commercial purpose.” This provision, read in conjunction with Section 2(42) of the Indian Consumer Act, covers consumers of financial services, except where such service is provided free of charge.

2.Financial Consumer Protection Authorities

The Report states that there needs to be an authority in-charge of implementing the financial consumer protection and that such authority is required to be clearly endowed with such powers. There is no standard model on which countries are to base their institutional architecture on although the Report does suggest a separate authority for the purposes of financial consumer protection. The authority needs to have the necessary powers not only for regulation but also for implementation of the consumer protection rights by having the powers to review the standards followed and to penalise detractions.

A separate, dedicated financial consumer protection authority, although desirable, is not feasible in many countries. There are a number of countries such as Armenia, Brazil, Nigeria and Portugal wherein the financial consumer protection authority is also the prudential regulator.

There are broadly five types of models of consumer protection authorities:

1. Integrated Single Financial Sector Authority Model – Prudential and consumer protection activities fall under a single authority for all financial service providers.
   
   
2. Integrated Sectoral Financial Sector Authority Model – Prudential and consumer protection activities fall under different authorities sector-wise (e.g. insurance).
   
   
3. Dedicated Financial Consumer Protection Authority Model – Consumer protection separated from prudential activities, however, there is one consumer protection authority for the entire financial sector.
   
   
4. Shared Financial Sector and General Consumer Protection Authority Model – Financial prudential authority and a general consumer protection authority share the responsibilities and
   
   
5. General Consumer Protection Authority Model – All consumer protection, financial and non-financial falls under the same authority.

While the most common model is the Integrated Sectoral Financial Sector Authority model, Australia falls within the Dedicated Financial Consumer Protection Authority Model, also referred to as the ‘twin peaks’ model and India has a General Consumer Protection Authority model.

The Report identifies that the primary issue in this area lies in the ambit of the financial authority, i.e. the method of including financial services providers other than traditional banks. Typically the prudential regulator of banks is concerned with the financial consumer protection and when the financial service providers are not governed by such prudential regulators, the consumer protection mechanism exercised by the regulators can provide no relief to the consumers of non-bank financial service providers.

It is suggested in the Report that the financial service providers other than banks should be governed by the consumer protection authority, especially such service providers which present a high-risk to consumers. It is in this context that the need for registration, if not licensing, of all financial service providers will play a key role.

The second issue highlighted by the Report is the possible conflict between the activity of a authority as a prudential regulator and as an enforcer of consumer protection rights. Where a prudential regulator is keen on preserving the trust and sanctity of the market, the consumer protection implementer would do best by exposing practices that are harmful or potential damaging to consumers, thus, reducing the trust in such financial service providers.

In light of this, a separation of the two functions, whether in separate bodies or as separate departments within the same authority may be the only method of proceeding. However, it is imperative that both the prudential regulatory powers and the consumer protection be awarded the same importance so as to balance the interest of the financial service providers and the service recipients, i.e. the consumers. Majority of the countries have separated their consumer protection function from the prudential regulation function.

In Australia, the prudential regulation of the financial sector is undertaken by the Australian Prudential Regulation Authority and the financial consumer protection is largely undertaken by ASIC.

In India, the various sectors within the financial sector, each have their own prudential regulator. The banking and other finance companies are regulated by the Reserve Bank of India (‘RBI’), the securities sector is governed by the Securities and Exchange Board of India, the insurance sector is governed by Insurance Regulatory and Development Authority of India and the insolvency is governed by the Insolvency and Bankruptcy Board of India.

For the smooth functioning of a balanced and healthy financial market, there needs to be a clear lines of communication and coordination between the prudential regulators and the authority enforcing the consumer protection. For example, in the United Kingdom, the Financial Conduct Authority and the Bank of England, in its capacity as the Prudential Regulation Authority, have entered into a memorandum of understanding which clearly outlines the functions of each authority, the information exchange, and so on.

Coordination is also important between the consumer protection authority and the competition authority, since competition regulation has an impact on the consumers’ choices as well as financial inclusion. This is especially important where the competition authority has to also look after the consumer protection in countries such as Australia, Brazil and Singapore.

Apart from the competition coordination with consumer protection, there is, increasingly, another sector which has gained momentum its fast paced development and which has, today, become vital in the access to quick and efficient financial services, i.e. the telecommunications sector. The availability of mobile networks has made the payment system accessible and smooth by providing banking functions at the consumers’ fingertips. Countries such as Ghana, India, Myanmar and Zambia lead in the coordination between telecommunications and other relevant authorities, i.e. financial or general consumer protection.

Lastly, interaction with the consumer associations plays an important role in being able to coordinate effective prudential regulation and consumer protection even in areas which are not part of the formal financial sector. It depicts the involvement of the community as a whole in the legislative process and provides a mechanism whereby certain aspects which were hereto unimagined, may be highlighted by the consumer forums and be incorporated in the legislation.

3.Regulatory Framework

The Report states that the regulations governing financial consumer protection should be meticulously drafted so as to not miss out on any aspect of financial services. The drafting must achieve the balance between being comprehensive and understandable; the pit-fall of having any overly technical regulation that is too complex to interpret would defeat the purpose of the regulation since the complexity may lead to inconsistency in interpretations and therefore decrease the reliability on the regulation.

For example, in Australia, the consumer protection is split between ASIC and the ACCC, following the Wallis Committee Recommendations in 1998. The result has been described by Judge Rares as a “legislative porridge”. More pertinently, it is Part 2, Division 2 of the ASIC Act which directly governs financial consumer protection.

In India, the Indian Consumer Act, the rights of the consumers are extrapolated on a combined reading of the procedural provisions along with the definitions. However the primary provision establishing the duty of the central authority to protect consumer rights is Section 18.

The drafting of regulations, according to the Report, should be undertaken after including the inputs from various sections of the economic society, i.e. the industry players, the financial service providers as well as any consumer groups. Drafting of more effective regulations could also be undertaken after undertaking behavioural research and studying the legislations present in other countries.

ASIC has undertaken behavioural research before drafting their regulation or making any alterations to it. There is no conclusive evidence of India having undertaken behavioural research before drafting of the Consumer Protection Act, 2019.

Lastly, guidance may be taken from documents, reports and papers issued by international organisations such as the OECD and this Report. The international organisations, such as the OECD undertake extensive research before compiling any such document and therefore, the report ultimately produced may be relied on by any country as a guide, as has been undertaken in this paper.

4.Supervisory Activities

The supervisory activities should be commensurate with the consumer risk. It should be crafted so as to be able to weed out any inadequate or incorrect practice before the same turns into an issue. The Report suggests a tiered approach wherein smaller enterprises can be monitored effectively by only taking action when a problem or an issue emerges without having a constant stream of data flowing from the smaller enterprises to the authority on a regular basis.

The issue with non-availability of financial technology and literacy with smaller enterprises both in Australia as well as India is still a concern. For the purposes of monitoring smaller enterprises that cater to rural areas and which have the additional obligation to constantly provide the authority with data in a physical manner would be nothing short of a mammoth task not only on the service providers, in terms of compliance, but also on the authority in terms of processing such data. Such onerous compliance requirements may dampen the entrepreneurial effect.

On the other hand, the larger firms, including traditional banks, who typically have access to sophisticated technological systems, may find it easier to isolate and transmit the relevant data to the authorities in a timely manner. The economies of scale plays a role in determining the actual economic burden of compliance costs, and generally rendering such burden insignificant. Thus, the larger firms could be subject to ‘pre-emptive supervision’.

The monitoring practices should ideally be wide enough to encompass any future advent in technology or digitisation, since the dissemination of services through technology comes with its own set of issues which ideally have their own set of practices to be followed for consumer protection, i.e. encryption of sensitive data, reliant functioning of the application through which the services are disseminated, and so on.

An important aspect of supervising the functioning of consumer protection, according to the Report, is the collection of data which most efficiently identifies the important aspects of consumer protection. This step, however, may not be feasible in every country since the amount of data to sift through may be enormous, outdated or even irrelevant. Identification of the exact data needed would have to be included in any rule or regulation created for the processing of the relevant data by the authorities, for example the pricing mechanism.

Apart from identifying the exact data required for efficient monitoring or supervising of financial consumer protection, the time at which such data is provided to the authority is also of equal essence. Delay in remitting the required information creates a delay in the monitoring mechanism and can have an impact on effective consumer protection by the authority.

The Report suggests that financial consumer protection authorities should use a variety of different methods such as monitoring market and reviewing of particular processes, i.e. ‘thematic reviews’, in order to efficiently review and identify the possible problem areas.

Globally, according to the World Bank, the typical methods of supervision used by authorities, in decreasing popularity, are as follows:

1. Providing inputs during drafting of regulation;
2. Remote inspection;
3. Site visits and in-person investigations;
4. Review of data on the in-house complaints resolution system;
5. Monitoring the market behaviour of the financial service providers;
6. Review of specific, problematic processes;
7. Review of the fees charged for the provision of services;
8. Consumer research.

5.Enforcement Mechanisms

It would be ideal to have in place penalising mechanisms for non-compliance of any of the preceding powers of the authority, such as the inadequate or delayed data remittance by the financial service providers to the authority. This is essential because without such mechanism in place, the authority would have no recognisable power.

The penalising provisions should be commensurate with the breach of obligations by the financial service providers. The other factors that need to be taken into consideration are the gravity of the breach of obligations, the amount of damage caused to the consumers, the amount of benefit received by the financial services provider from the breach, history of the financial services provider in terms of breaches, and so on.

The following are the general methods used by authorities to exercise their powers:

1. Imposition of fines and penalties;
2. Written warnings;
3. Force the financial service provider to withdraw their product from the market;
4. Sanction the management and senior personnel of the financial service provider;
5. Revoke or suspend the license of the financial service provider;
6. Order the refund of fees or similar charges to the consumer; and
7. Notify the breaches publicly.

The Report states that the authority in charge of protecting consumer rights should be empowered to undertake corrective measures within a timely manner which echoes the principle that justice delayed is justice denied. Without a time bar on the imposition of sanctions, it is highly likely that the integrity of the financial authority may be tarnished since it may lead to the perception that the authority itself does not consider consumer protection as an important or grave matter and that the financial service providers may believe that they can get away with minimum to negligible consumer protection.

Another important factor raised by the Report for the purposes of maintaining the integrity of the authority is that for every similar type of breach or infringement, a similar punishment should be meted out unless there are extenuating factors that beg a higher penalty.

Subdivision G of Division 2 of Part 2 of the ASIC Act deals with the penalties that ASIC may enforce. Following are the types of penalties envisaged under the ASIC Act:

1. Pecuniary penalty (Sections 12GBB) with the maximum limit prescribed under Section 12GBC;
2. Order to relinquish the benefit derived from the breach (Section 12GBCC);
3. Criminal proceedings (Sections 12GBCG, 12GBCH and 12GBCJ);
4. Imposition and recovery of fines (Section 12GC);
5. Compensation to those who suffer damages as a result of the breach or contravention (Section 12GCA);
6. Injunction (Section 12GD);
7. Orders requiring publicity (Section 12GLB);
8. Publicly issued warning or notice (Section 12GLC);
9. Order disqualifying managerial persons (Section 12GLD);
10. Orders to redress the losses suffered by non-party consumers (Section 12GNB); and
11. Interventions by ASIC (Section 12GO).

Of the types of penalising provisions suggested in the Report, ASIC seems to contain all the necessary powers although the power to revoke the license of the practicing financial service provider within the ASIC Act. However, it is the Corporations Act, 2001 by virtue of which ASIC has been bestowed the power to suspend, cancel or vary the license granted to financial service providers.

In the Indian context, the following types of penalties are envisaged under the Indian Consumer Act:

1. Reimbursement of the price of the services (Section 20(b));
2. Discontinuation of the practices which are unfair and prejudicial to consumers’ interests (Section 20(c));
3. Modify existing practice or declaration or advertisement (Section 21(1));
4. Pecuniary penalty (Section 21(2));
5. Suspend activities of the service provider as a penalty. The duration of the suspension could range from one year to three years (Section 20(3)); and
6. Imprisonment up to a period of five years (Section 89).

India does not contain provisions requiring the financial service provider to repatriate the profits received through such activities back to the consumer. However, it is to be noted herein that the Indian Consumer Act, by virtue of being a general legislation has to protect consumers against unfair trade practices of both goods and services. The provisions in relation to spurious and defective goods hold much graver consequence than those in relation to unfair trade practices in services.

6.Codes of Conduct or Self-regulation

It is ideal where the existing legislative framework permits the development of self-regulatory practices such as forming of associations which issue codes that the members have to abide. This practice ensures that consumer protection, among other things, becomes a part of the business morality and business standard.

Various countries have some form of association of the banking sector who issue their own set of codes or guidelines which are to be followed by member banks. For example, the Australian Banking Association has released a new Banking Code of Practise, 2019, and similarly the objective of the Indian Banks’ Association is to promote and develop sound banking principles amongst its members.

While self-regulation by associations and, to some extent, even in-house codes of conduct issued by corporates, i.e. the financial service providers, their influence on the market conduct can only have a persuasive value and not be binding on the service providers. In order to tackle this, the Report suggests are the financial consumer protection authority recognise and endorse the self-regulation.

For example, the Non-banking Financial Companies (NBFCs) in India are regulated by self-regulatory organisations which have been formally recognised by the RBI.

7.Broadcasting relevant information

According to the Report, it is imperative that the authority for financial consumer protection regularly releases relevant information amongst the stakeholders, such as the consumer groups and the financial service provider peers.

Such information should ideally include the list of licensed or registered financial service providers so that consumers may make an informed decision on which service provider to bank with, and so on. The authority should ideally keep tabs on any ongoing disputes, the resolution or outcome and provide a mechanism whereby such orders are reported for the benefit of the larger diaspora of consumers.

CHAPTER 2: TRANSPARENCY AND DISCLOSURE

1.Method of disclosure:

The Report states that it is not only the content of the financial services product that must be taken into account when formulating disclosure norms but also the point of time and the manner, i.e. electronic or written or oral, in which the content is disclosed that plays an important role. For example, if the total price of the fees and charges are communicated to a consumer after entering into a contract with the financial services provider, rather than before, the consumer, at the point of entering into the contract would not be considered to have all the relevant information required to be providing a proper consent, or consensus ad idem, and this contract, under Indian law, would be voidable at the option of the consumer.

The following points have been prescribed as important aspects in relation to increasing the transparency through appropriate disclosure norms:

1.Language:

The Report prescribes that the language used must be simple and without undue jargons. This would ensure that all the consumers, not only the most literate consumers, but also those from lower income brackets who may not have enjoyed a higher level of education or possess high literacy, would be able to understand the exact nature of the transaction being entered into.

The banking sector, not being confined to the domain of the wealthiest or most educated, as it was erstwhile, and now becoming a necessity for everyday transactions and business, will have to adapt in order for it to cater to all its consumers. This adaptation would not only require modification of the products issued but also the amount of information required to be disclosed and the language in which the disclosure is undertaken.

In Australia, given the majority of European settlers, all the official documents are in English, which has now been recorded as the de facto national language, and, in fact, all persons looking to immigrate or study in Australia have to pass an English Language test.

India, on the other hand, has 22 official languages and at least 19,000 undocumented languages and dialects being used at present. This poses a considerable challenge on the documentation front since every state in India has a different official language and the majority of the residents in that state best understand the local language.

2.Format:

The Report recommends that the format followed be standardised in order for a consumer to be able to better compare similar products issued by various financial services providers. At least the basic details, such as the price and manner of creating the charge, must be clearly displayed, preferably in a standardised manner.

The second recommendation, or standard, that the Report sets is that the key features of a product, in essence, its duration, price and important terms and conditions, should be disclosed in a manner that is easy to locate and understand. The key terms should be distinguished from the rest of the lengthy contractual terms; however, the lengthy contractual terms, being of equal importance, should also be made easily accessible and available to a consumer.

The Report states that the font, in written, and speed, during oral disclosures play an important part. The text should not be too small or illegible and the speed at which oral terms, when relayed to a consumer, should not be too fast.

The state government of Victoria, Australia, has, in conjunction with Norton Rose Fulbright Australia, published a standard for of loan agreement on its website. Although the sample or model contract shared is in relation to project finance loans, and not personal loans, the first three pages of the sample loan agreement contains the essential terms such as the names of the parties, amount borrowed, the duration of the loan agreement, the applicable rate of interest and the repayment schedule. India, on the other hand, does not issue any such standard form of loan agreements.

In 2008, the Indian securities prudential regulator, Securities and Exchange Board of India imposed a ‘slow down’ on the radio advertisements which relayed the market risk and terms and conditions of investing in a mutual fund, from 3 seconds to at least 5 seconds so as to keep the risk warning lucid for the consumers.

3.Digitisation:

With the change in the format of disclosure from physical to electronic, it is important that the financial services providers deliver the contracts not only in the physical form but also in an electronic format whereby the consumers can easily store it for later reference. Certain banks, when providing mobile banking services, utilise the short message services to digitally communicate receipts of the transactions. These should be treated at par with physical invoices.

The pitfall from over-regulating any aspect of business for the purposes of consumer protection is the cooling effect it may tend to have on innovation and growth of that aspect of business. Similarly, when it comes to regulation of the financial services and information provided electronically by the financial services providers, it is important that this regulation not be so exhaustive as to vex any further development.

In Australia, ASIC has regulatory guides which although not mandatory to be followed, can act as a benchmark of the position ASIC takes on certain matters. Regulatory Guide 209 deals with Credit Licensing: Responsible lending conduct which sets out the disclosure requirements by licensees who undertake lending or credit activities.

At present, in India it is a prudential regulator, the RBI, that has prescribed the five basic financial consumer rights amongst which is contained the right to transparency.

4.Cost:

The Report has highlighted the aspect that the compliance costs with regard to disclosure should not be undue on the financial services providers.

2.Advertising and Sales

The authority must lay down certain standards and regulations for advertisements so as to safeguard the interest of the consumers from any misleading or deceptively relayed information that the financial services providers use to advertise. The Report states that the advertisement should contain contact information for internal and external redressal mechanisms.

3.Disclosing Necessary Terms and Conditions

The Report lays down the following things that the law governing financial consumer protection should require the financial services provider to disclose to the customers:

1. Regulatory status of a financial service provider;
2. The financial services provider and consumer’s rights and duties under the agreement, the manner in which such rights and duties may be altered and the manner in which such alterations are to be notified to the respective parties;
3. The applicable rate of interest, costs, fees and any other charges that may be incurred by the consumer and the point of time at which they may become payable;
4. Circumstances in which the termination of the agreement may occur;
5. The contact details of the customer service of the financial services provider and the manner of resolution of agreements; and
6. A copy of the final agreement with all the attachments and annexures should be made available to the customer.

The above points are to be made mandatory because disclosure and transparency of the procedure and costs are the cornerstone of any functional consumer protection law. In the absence of disclosure requirement of either the complete nature of the transaction, or the costs or fees involved, or the dispute resolution mechanism, any consumer protection legislation would be toothless.

Digital transactions are accompanied with their unique challenges on the disclosure front especially when taking into account the remoteness of the customer, the speed with which the transaction is expected to be concluded and oftentimes, the size of the screen. Where the product is being released electronically, it is important that financial services provider ensure that all the relevant terms and conditions are adequately displayed, or, alternately, made available to the customer via email for future reference.

4.Key Product Terms

Every financial services provider should be required to disclose the key terms of the financial product being released by them, whether such product is in the nature of a credit or loan instrument or a deposit instrument.

The Report suggests that the terms and conditions required to be mentioned can be categorised into generic and product-specific – the goal of having a generic set of conditions laid down is in order to not escape the requirement to relay the mandatory information; and that of the product-specific set of information can be liquid eno9ugh so as to be remodelled in accordance with the nature of each product.

The generic set of requirements can also address the standard set of information which must be compulsorily disbursed by a financial service provider, such as the regulatory status of the service provider, the customer service mechanism or other redressal mechanism. The specific set of requirements for each product could also include specifications of the customers themselves, including customer details and credit ratings.

In Australia, ASIC requires every financial services provider to issue a Product Disclosure Statement, as mentioned in Regulatory Guide No. 168: Disclosure: Product Disclosure Statements (and other disclosure obligations).

The RBI, through its Master Circular on Customer Service in Banks dated 1 July 2015, lays down the format of the key factual statements which provides generic details that outline the information that a financial services provider must provide to the customers.

5.Written Statements

All financial services providers must ensure that they release written statements of the performance of the product to their customers in a routine manner so as to disburse the information required and to appraise the customers of their present financial situation. There should also be a separate statement at the end of the contract or at the time of redemption of the financial product.

Apart from routine manner and at the termination of the contractual term, the financial services providers must also make available the current status of the performance of the financial product upon demand by the financial customers.

The statements should necessarily contain the following:

1. Regulatory status of the product issuer;
2. Customer service mechanism; and
3. External mechanism for dispute resolution, if necessary.

Where the statement is in relation to a deposit accepting product, the same should additionally contain the following:

1. Balance present, including the balance that was present at the beginning of the period of the statement and at the end;
2. List of the transactions undertaken in the period spanning the statement;
3. All applicable rates, charges, fees and the nature of the same and the time at which such rates, charges and fees were debited;
4. Any earning, whether in the nature of interest or otherwise.

According to the Report, the statements, must be regulated in order that they can be easily understood by an unsophisticated investor or depositor who is a financial consumer. If there are any outstanding charges due from the customers, this must be clearly mentioned in the statement along with the nature of the charge and the reason for the requirement of the payment.

6.Change in rates or terms and conditions

As important as it is for the rates, charges, fees, terms and conditions to be disclosed to the financial consumer at the time of entering into the contract, it is equally pertinent that any changes undertaken to these must be immediately notified to the consumer so that the consumer is aware of the financial situation and is in a position to make an informed decision of whether or not to continue as the consumer of the particular financial product.

The time within which such notice of change is to be given to the financial consumer differs from jurisdiction to jurisdiction, and in certain cases an advance notice is also mandatory, however, there is no justification for a delay on part of a financial services provider. A delay puts the customer at a disadvantage and it is not in the interest of an effective consumer protection legislation to condone delays by the financial services provider.

Ideally, the agreement as between the financial services provider and the consumer should stipulate the method, including the time and manner, in which a notice of change of terms and conditions should be communicated by the financial services provider to the consumer.

CHAPTER 3: MANNER OF CUSTOMER TREATMENT AND BUSINESS CONDUCT

1.Prejudicial terms and conditions

Standard form of contracts, by virtue of being drafted primarily by the financial services provider, tend to be one-sided in nature given that the financial services provider have to ensure the incorporation of various mandatory provisions and customer data and that the financial customers seldom have any leeway in modifying the terms of the contract once the same has been presented to them. Generally, financial consumers are not highly sophisticated or literate in order to grasp the full meaning of each and every complex or specialised term used in the contract.

The fairness of the terms of the contract need not be limited to the scope of services provided by the financial services provider but also extend to the manner in which various fees, charges and interest rates are levied on the financial consumer. Other examples of unfair terms, according to the Report, are the unilateral revision of the terms of the contract without requiring prior notice to be given to the customer. This leads to the customer being unaware of their rights and obligations under the contract and may even lead to the applicability of an unforeseen penalty.

The Indian Consumer Act protects against unfair terms in a contract by including within the ambit of the act ‘unfair contract’ which, as per Section 2(46) of the Indian Consumer Protection Act, 2019, includes:

1. Requirement of excessive security deposits;
2. Imposing disproportionate penalty;
3. Refusing early repayment of debt, loan or penalty;
4. Unilateral termination of contract without cause or assignment of contract to the detriment of the other party;
5. Imposing unreasonable charges, obligation or condition on the consumer.

2.Unfair practices

The Indian Consumer Act has introduced the term ‘unfair trade practices’ within its ambit, which, according to Section 2(47) of the Indian Consumer Protection Act, 2019, includes making any statement, oral or written which:

1. Misrepresents the standard of the services provided;
2. Misrepresents the sponsorship of the services provided;
3. Misrepresents the sponsorship or affiliation of the financial services provider;
4. Misrepresents the need or usefulness of the services provided;
5. Provides false or misleading facts degrading the goods or services of another person, and so on.

In Australia, it is the Australian Competition and Consumer Commission is in-charge of ensuring that businesses do not undertake unfair practices such as the following:

1. Referral selling;
2. Pyramid schemes;
3. Unfair contract terms;
4. Unconscionable conduct; and
5. Accepting payment without intention of supplying goods and services.

Similar to the above provisions, the Report states that an ideal consumer protection legislation should protect the consumers from any unfair practices sought to be undertaken by any financial service providers. The Report names the following practices as examples of unfair practices:

1. Charging customers for fees related to unsolicited preapproved credit cards;
2. Unilaterally increasing the credit limit; and
3. Charging maintenance fees for accounts that are inactive.

The Report suggests that the unfairness in the business practices and therefore the consumer protection authorities must, as depicted above, lay down a minimum standard of practice so as to weed out certain known unfair practices.

3.Sales Practices

The sales practices that are used by financial services providers should be regulated so that financial consumers are not coerced or duped into entering into agreements or purchasing financial products with the financial services providers. The techniques employed by the financial services providers should not be permitted to be misrepresentations, discrimination or aggressive.

The Commonwealth of Australia has released a book on sales practices to act as a guide on proper and improper sales techniques for businesses and legal consultants including guidance on what constitutes unfair sales techniques.

4.Product Suitability

The Report suggests that the products marketed to the customer must be in accordance with what is apt in terms of the socio economic background of the financial consumer. It is important that a consumer with limited means not be put into a position where they are being bled by fees and charges for products that are not commensurate with their level of income.

In India financial services providers can strive to provide as personalised an experience as possible depending on the resources available and the sector they work in. Financial advisors may be mutual fund distributors, registered investment advisors and national distributors of financial products such as banks and NBFCs.

However, in Australia there are separate licenses required by financial services providers to provide generic financial advice and personal financial advice.

5.Regulation of employees and agents

The Report suggests that the consumer protection regulations should ensure that the persons discharging financial advice on behalf of the financial services provider, such as employees and agents, are competent. In order to ensure competency, it is suggested that all persons providing financial advice to the consumers should be regulated and only those who have attained certain predetermined competency levels should be given the license to practice and provide financial advice.

The regulation of relationships between the financial services providers and their representatives, that is, the employee or agents should be strict enough to hold liable the financial services providers for all actions, omissions and promises undertaken by the representative in the course of provision of the financial advice.

In addition to the licensing and liability requirements, it is pertinent that the compensation mechanism of the employees and agents are not structured such that they lead to conflict of interest between the interest of the consumer and the personal interest of the employee or agent. The Report suggests that in the presence of a commission accruing to the employee or agent for rendition of a particular financial advice, such commission should be conveyed to the customer, as far as is practicable.

6.Fraud and malfeasance

The regulations seeking to protect financial consumers in place should address all and any misuse or loss incurred by the customers due to unwarranted actions on part of financial services provider. There are, of course, limitations in the nature of fraud on part of the consumer, which would eliminate such consumer from being able to claim any compensation for losses suffered.

As discussed prior in this paper, the relevant consumer protection laws of both India as well as Australia, provide for compensatory mechanisms for losses incurred by financial consumers.

7.Debt Collection

Provision of financial services including sale of financial products rarely terminates in such sale and typically extends to requiring collection of outstanding debts. From the perspective of a financial consumer, the debt collection mechanism is equally important as the disbursement of a financial product which creates a debt liability to begin with.

The Report suggests that the debt collection regime should adequately protect the rights of the financial services provider with the obligation of the financial consumer but also meanwhile protecting the consumer from harassment or false statements which may lead to coercion of the financial consumer.

In India at present there is the Insolvency and Bankruptcy Code, 2016, which balances the rights and obligations of the financial services provider and the financial consumer, whether the consumer be an individual or a corporate person. Australia has the Australian Financial Security which aids in dealing with bankruptcy of individual financial consumers.

CHAPTER 4: DATA PROTECTION AND PRIVACY

1.Collection and usage of customer data

The consumer protection law should prescribe the manner in which a financial services provider may collect, store and use the consumers’ data. The Report highlights the fundamental right of privacy of every person, whether natural or artificial and in this regard the importance of the consumer protection law protecting the information of the consumer against any possible misuse by the financial services provider is highlighted.

The Report suggests that the financial services providers should be afforded the permission to use the customers’ data within reasonable means and only after the consent of the consumer is obtained.

It is to be noted herein that even though India recognises the right to privacy as a fundamental right, there is no such recognition in Australia of privacy being a fundamental right. By virtue of the Privacy Act, 1988 (Cth) and the subsequent Privacy Amendment Act, 1990 (Cth), the right to privacy has been recognised as a statutory right and is protected accordingly.

2.Confidentiality and security of customer data

Customer protection regulation should ideally prescribe mechanisms to be followed by financial services providers in order to maintain the confidentiality and sanctity of the data collected by the financial customers. The Report suggests that the financial services providers should adequately undertake the training of their staff and agents to regulate the handling, handover and, where required, deletion of the customer data.

This is extremely important in the advent of the digital age whereby certain precautions in terms of PINs being used by customers for the dual purpose of identification and authorisation of the transactions at hand.

Although the nature of the relationship between a financial services provider and the customer is complicated and dependent on various peculiar factual matrices, typically in India, the Supreme Court has laid down the law in terms of the relationship between a financial services provider and the customer, for example a bank and its customer, to not constitute a fiduciary relationship, but a contractual one. Similarly, in Australia, the relationship is not legally understood to be fiduciary in nature, however, there are situations where the relationship acquires a fiduciary flavour.

However, in spite of the relationship not being fiduciary in nature, there is typically a contractual obligation stipulating maintenance of confidentiality which the financial services provider is required to adhere to. Australia and India, both being common law countries, recognises the banker’s common law contractual duty of confidentiality towards its clients.

3.Sharing customer data

The Report states that sharing of customer data should be permitted but with a certain rules and regulation to that end. One method of requiring financial services provider to share data is regulatory requirement such as sharing data with the revenue department and other such government departments.

Another method in which sharing of customer data may occur is through a contractual requirement. Open banking is an example of the manner in which sharing of customer data by the financial services provider may be contractually required, subject to permissions and regulations. The concept is essentially a technological interface between applications of the financial services provider and other third party firms whereby the other firm can access all the documents and data of the consumer which is present with the financial services provider, after receiving consent of the consumer. By using the data so easily provided, the third party firm can tailor make experiences for the consumer such as set up preferred payment methods.

India has introduced open banking in its financial sector with the unveiling of Unified Payments Interface early 2019 to improve the digitisation and thereby the automation of payments methods.

Australia, with effect from January 2020, is positioned to enter the open banking arena. Open banking has been advertised to be in the interest of the consumers by inviting the advent of technology in the sphere of consumer experience in the finance industry.

Therefore, both countries have in place mechanisms for the sharing of customer data as and when the same is required by the customer or by any governmental department.

CHAPTER 5: DISPUTE REOLUTION MECHANISMS

One of the most important aspects of having in place an effective consumer protection policy is the ability of the financial services provider as well as the governmental regulator in charge to be able to address all issues and complaints in regard to the financial product sold. Therefore, the Report prescribes basic requirements for the internal complaints handling mechanism and alternative dispute mechanisms as outlined below:

1.Internal complaints handling mechanism

Every financial services provider should have in place an efficient and just mechanism and independent, designated team to handle the complaints of the consumers pertaining to their financial product.

The mechanism should ideally outline the following, as a matter of standard procedure:

1. The maximum number of days within which the complaint may be resolved;
2. The manner in which the consumer redressal teams’ contact details may be publicised and the manner in which complaints may be received, i.e. telephone, fax, email, and so on; and
3. The training required for handling the complaints of the consumers such as the standard responses and the method and time for the escalation of a problem, and so on.

The Report suggests that the financial services providers should maintain a database of their consumer complaints and the manner and duration in which resolution was provided for each complain. This falls in line with the Principle No. 9 of the G20 High Level Principles on Financial Consumer Protection which states that all jurisdictions should ensure that customers have access to consumer complaints redressal mechanisms which are “accessible, affordable, independent, fair, accountable, timely and efficient”.

2.Alternate dispute resolution mechanism

The Report envisages the requirement of an out-of-court dispute settlement mechanism where the consumer is unsatisfied by the redressal granted by the financial services provider. However, the Report suggests that approaching this forum for a resolution of the dispute between the consumer and the financial services provider must be provided to the consumer for no charge.

Where India does not offer any such free alternative forum for consumers to bring their issues to be resolved, Australia has the Australian Financial Complaints Authority which provides a free, alternative forum for consumers to bring their complaints and seek resolution.

CONCLUSION

Both Australia and India have the necessary legal framework for the protection of financial consumers. In this regard, Australia’s legislation for financial consumer protection which is divided between a general consumer protection legislation and a specific financial consumer protection, however, India is functioning with a general consumer protection framework. The trade-off is that Australia’s financial consumer protection framework has been called a ‘legislative porridge’ due to the numerous provisions to be understood for the purposes of determining whether the consumer bringing the dispute should be protected as a financial consumer or otherwise.

For the purposes of regulatory authorities, Australia has the twin peak model whereby one authority is solely in-charge of market regulation and financial consumer protection; India functions with multiple, sector-specific regulators with one overarching consumer protection forum. The enforcement mechanisms in the two countries is not vastly different so much as the regulator in-charge of enforcing the penalties applicable to any misconduct by a financial services provider.

The transparency and disclosure mechanisms significantly differ in both countries as there are language differences, availability of a standard form of loan agreement available to customers for referencing purposes and the requirements outlined by both regulators, i.e. ASIC and RBI, to be published by the financial services provider are different.

The terminology attached to various misconducts and unfair practices differs in both countries however, the ultimate goal of consumer protection is served one way or another in the sense that the act of a referral scheme (under Australian law) may be construed as a misrepresentation of sponsorship or affiliation of the financial services provider (in India) and thus be penalised in both countries.

For the purpose of provision of financial services, both countries have in place licensing regimes. Where Australia has individual licenses and different licenses for general and specific advice, India has sector-specific licensing requirements.

The protection and management of data protection of the customers has become the centre of consumer protection with the advent of financial technology which has led to the rise of countries opting for open banking; India in 2019 and Australia in 2020.

Lastly, both countries have in place mechanism for internal redressal of consumer complaints however, only Australia has a mechanism in place for free external alternative dispute resolution. India is yet to have in place a mechanism which provides an alternative forum to the consumer free of cost.

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1.Cases

1. Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) FCA 1028.
2. Uco Bank v Hem Chandra Sarkar [AIR 1990 SC 1329].
3. Justice K.S. Puttaswamy (Retd.) v Union of India (W.P. Civil No. 494/2012 decided on 26 September 2018).
4. Suganchand & Co. v Brahmayya & Co. [AIR 1951 Mad 910].

2.Legislation

1.Australia:

1. Australian Securities and Investments Commission Act, 2001 (Cth)
2. Corporations Act, 2001
3. Privacy Act, 1988 (Cth)
4. Privacy Amendment Act, 1990 (Cth)

2.India:

1. Constitution of India, 1947
2. Indian Contract Act, 1872
3. The Consumer Protection Act, 2019

3.Other

1. Department of Home Affairs, Australian Government, Functional English, (Web Page, 2019) <https://immi.homeaffairs.gov.au/help-support/meeting-our-requirements/english-language/functional-english>.
   
   
2. ‘Languages in India’ Maps of India, (Web Page, 19 November 2019) <https://www.mapsofindia.com/culture/indian-languages.html>.
   
   
3. Australian Securities and Investments Commission, Responsible lending disclosure obligations: Overview for credit licensees and representatives (web page) <https://asic.gov.au/regulatory-resources/credit/responsible-lending/responsible-lending-disclosure-obligations-overview-for-credit-licensees-and-representatives/>.
   
   
4. The Reserve Bank of India, Charter of Customer Rights (Web page, 3 December 2014) <https://rbidocs.rbi.org.in/rdocs/content/pdfs/CCSR03122014_1.pdf>.
   
   
5. Australian Securities and Investments Commission, ‘Regulatory Guide 168: Disclosure: Product Disclosure Statements (and other disclosure obligations)’ (Web page, October 2011) <https://download.asic.gov.au/media/1240931/rg168-published-28-october-2011.pdf>.
   
   
6. Reserve Bank of India, Master Circular on Customer Service in Banks, (Web page, 1 July 2015) <https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9862>
   
   
7. Commonwealth of Australia, Sales Practices: A Guide for Businesses and Legal Practitioners (Online Resource, March 2016) <https://www.accc.gov.au/system/files/Sales%20practices%20-%20a%20guide%20for%20businesses%20and%20legal%20practitioners_0.pdf>.
   
   
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Deloitte Australia, ‘Open Banking: Value Unlocked’ (Web page, 2019) < https://www2.deloitte.com/au/en/pages/financial-services/articles/open-banking.html>.