Consumer Protection Laws For Bank Customers By: Khyati Kanoje

Consumer Protection Laws For

Bank Customers

Submitted By: Khyati Kanoje                                                                                         

3rd Year, BALLB (H.)

KRITI P. MEHTA, SCHOOL OF LAW, NMIMS, INDORE

Table of Contents

Abstract

Introduction.

Global scenario.

Is there a necessity for consumer protection laws in banking sector?.

Techniques Currently Used in India to Ensure Consumer Safety.

Mandatory information disclosure:

Problems in this system:

Literary and Awareness

Charter of Consumer Rights

Redressal Agencies

Conclusion.

Abstract

Since the Global Financial Crisis in 2008, many countries have recognized the need to protect the interest of consumers in banking sector.[1] India established the FSLRC[2] to address market volatility. It is crucial to protect consumers in financial services to prevent them from being misled by information or facing unfair regulations. However, in India, the Consumer Protection Act of 1986 primarily focuses on goods and services, with only limited coverage of financial services. The banking industry has a growing impact on the daily marketplaces that serve a massive customer base. It is becoming increasingly vital to the functioning of everyday marketplaces that serve the demands of massive numbers of people. During the years after the liberalization measures were instituted in 1991, it has flourished and risen to new heights.

The vast potential consumer base in India makes this industry one of the most dynamic in the world.  Which is why an important to make sure all the people connected to it, specifically its consumers are protected and remedies are provided to them. This paper is an attempt to analyze the current laws that are prevalent for protection of consumers in the banking sector.

Introduction

Consumer protection has become a crucial issue, and the Indian Parliament has passed various legislations to safeguard the interests of consumers by promoting transparency, fair competition, as well as stopping any malpractice or unfair practices. In 1986, the Consumer Protection Act was enacted to this end. While banking has undergone several reforms, including greater competition resulting from the dilution of government stakes and deregulation, it has also given rise to several issues that require attention to consumer protection. Competition can be beneficial for consumers, as it provides more choices, better quality services or products at lower rates, and reduces inefficiencies in the industry. Consumers should take advantage of the changing environment to benefit from lower banking costs, such as by using ATMs, internet, or telephone banking. Although India has a “Consumer Protection Act,”[3] it is not explicitly designed for the banking sector. However, banking consumer protection can be ensured through standards set by the

• Banking Codes and Standards Bureau of India (BCSBI),[4]
• fair practices codes followed by individual banks,
• in-house complaint redressal mechanisms set by banks,
• ombudsman offices,
• and courts of law.

A banker's normal duties include acting as a trustee, attorney, executor, correspondent, or representative of a customer, as well as buying and selling stocks and collecting cheques, dividends, bills, and promissory notes on the customer's behalf. The services offered by the Indian banking industry are comparable to those listed in Section 2 (1) (o) of the Consumer Protection Act, 1986, and are accessible to potential customers.

Customers who use a bank's services are the only ones the banking industry thinks about. Any person who opens an account, buys a bank draught, rents a locker, or obtains a bank guarantee from a bank is considered a customer of that bank.[5]

The roles and functions of different institutions may overlap at times, and customers can choose where to lodge their complaints based on their ease and location.

Global scenario

Following the 2008 Global Financial Crisis, a number of international regulations were implemented, and a new regulatory framework was created. In Australia, for instance, the Future of Financial Advice Act of 2012 mandates that financial advisors put their clients' needs first at all times. In the United States, the Consumer Financial Protection Bureau (CFPB) has revised regulation Z to conform to the recent changes made to the law enforcing truth in lending (TILA). And like in the Netherlands, independent financial regulators were set up to keep an eye on how complaints from customers were handled. Although the Indian government and financial institutions have tried to combat widespread mis-selling of products and services by increasing the availability of consumer information and training, the reality on the ground has not changed despite these efforts. For instance, between 2004-05 and 2011-12, investors may have lost as much as 1.5 lakh crores due to the improper sale of insurance. Another form of mis-sale and opposition to consumer protection is entry loads in mutual funds. This study makes an effort to take a close look at the methods currently used for consumer protection and to note the factors that point to appropriateness as the most effective method for consumer protection in India. It also includes advice for the benefit of customers and talks about how consumer protection laws are enforced and how complaints are resolved. The UN General Assembly's resolution No. 39/248 on 8/4/1985 provides the framework for developing countries to formulate consumer protection policies.

Is there a necessity for consumer protection

laws in banking sector?

The Reserve Bank of India (RBI)[6] has historically supervised banks, but has not paid much attention to the concerns of individual consumers of banking services. However, with the growth of the banking industry and increased automation, confusion has arisen over the wide array of options and costs, causing dissatisfaction among customers.[7] To address this, the RBI has established a “committee on procedures and performance audit on public services (CPPAPS)” of banks to examine customer service and recommend improvements. Private banks have attracted large customers but only want younger borrowers, leaving older citizens with declining interest rates and little interest from aggressive private banks. The Consumer Education and Research Centre (CERC) of Ahmedabad has called for clearer consumer credit laws and the setting up of a Consumer Credit Regulatory Commission to regulate lender-borrower relationships and resolve disputes. Private banks have received the most complaints over high fees and service charges. A comprehensive Consumer Credit Act is needed to distinguish between individual consumers and commercial transactions and provide better protection for bank depositors or borrowers. The Tara pore Committee will evaluate the existing regulatory system and recommend ways to stop unjust enrichment of banks. The committee must decide if it will advocate for existing banking laws or will additionally propose a Consumer Credit Act and Consumer Credit Regulatory Commission. It's obvious that some sort of action needs to be taken to better safeguard customers.

Techniques Currently Used in India to Ensure Consumer Safety

Consumers in India rely heavily on the consumer courts established under the Consumer Protection Act of 1986, due to the lack of any comprehensive consumer protection legislation. Consumers of particular financial products and services also have access to other dispute resolution options established by industry-specific regulatory bodies.

SEBI, RBI, IRDA, PFRDA, EPFO, and FMC are the six most important Indian regulators. Other organizations involved in regulation and oversight are NABARD, SIDBI, and NHB. There are also six departments at the federal and state levels involved. Regulation in India today is an example of what is known as "ex-ante approaches." They Include:

Mandatory information disclosure:

The most common method is mandatory information disclosure (MID), which is based on the idea that providing customers with more data helps them make better purchasing decisions. Many factors, including the products and services offered, the buyer's level of experience and knowledge, and the complexity of the transaction at hand, all play a role in determining the extent to which clients can be guaranteed adequate protection. All Indian authorities with authority over a given sector's financial institutions are privy to the latter's public filings. For instance, the Reserve Bank of India mandates that financial institutions provide customers with "complete and transparent information" on the goods they offer (such as loans and deposits). Banks are urged by the Reserve Bank of India's (RBI) Fair Practices Code for Lenders to provide their borrowers with clear and complete details about the loan's terms and conditions, including the interest rate, any fees associated with the loan, any penalties for late payments, and any refunds due to a loan's non-sanctioning.

Problems in this system:

While information disclosure can promote transparency and consumer awareness, studies have shown that it can have unintended negative consequences, such as:

• Overloading consumers with too much information, leading to sub-optimal decisions.
• Crowding out useful information with mandated information, causing consumers to overlook important details.
• Fiduciary asymmetry, where lenders have an advantage over consumers due to their superior knowledge of the information.
• Inequity in consumer protection outcomes.
• Consumer tendency to prioritize buying and enjoying the product over reviewing available information.
• Limited effectiveness in improving customer well-being over time, which cannot be the sole basis for consumer protection policies across countries.

Literary and Awareness

Theory behind using this strategy would be that if people are taught to think critically about money, they'll be better equipped to make sound financial decisions. India's financial regulators have pushed for better client results by instituting programs to increase financial literacy. For instance, the Reserve Bank of India (RBI) has just unveiled a national strategy to improve financial literacy. Around the country, SEBI has trained resource individuals who now lead numerous financial literacy programs in classrooms and dormitories. With the intention of disseminating free financial education and counselling, RBI launched the Financial Literacy and Credit Counseling (FLCC) model in 2009. Educators in India have some challenges, despite their best efforts to reach the country's vast population: The finance is a narrow sector in which individuals who are literate are competent enough to make decisions. Banking sector is on the other hand is wide as well as less technical.

❖ There is little correlation between financial literacy and sound decision making, as has been shown in numerous research.

Programs designed to increase people's financial literacy have also been shown to have little to no effect on their intended audiences. Consumers have a far lower degree of financial literacy than lenders, and so are less able to make informed decisions when making purchases.

Banking ombudsman

This plan, first introduced in 1995, was revised by RBI in order to encompass the increasing number of complaints. “The Banking Ombudsman” is a highly-ranking position which RBI appoints. Since then, it has become the go-to venue for settling legal disagreements. Decisions are made on a case-by-case basis without regard to precedent or, in some instances, procedural legislation. The Banking Ombudsman Office also organizes educational events, displays, and other forms of public outreach. There is a need to broaden the scheme's reach because it currently only covers 27 areas (online banking included). The Reserve Bank of India oversees the entire programme. Presently, there are 15 locations across the country where complaints can be filed due to some sort of shortcoming. If a bank violates the Lenders Fair Practices Code or the Code of Bank Commitment to Customers established by BCSBI,[8] a client may now file a complaint with BOS. The BCSBI has released two sets of regulations: one for micro and small businesses, and another for the commitment of banks to their consumers. However, despite banks' widespread adoption of these rules and their long history, the quality of service still has room for improvement. The countless complaints filed in the country under the Banking Ombudsman scheme attest to this.

Charter of Consumer Rights

RBI has recently taken a step towards consumer protection,[9] which includes several principles outlined below:

• The right to fair treatment: Both the service provider and financial customers have the right to courteous treatment, and no discrimination based on age, gender, caste, religion,[10] or physical abilities should occur.
• Right to have an honest and transparent communication:[11] Service providers should ensure that their contracts are transparent, easily understood, and properly communicated. They should disclose the product price, associated risks, customer responsibilities, and avoid any unfair or unjust business practices or undue influence.
• The right of suitability: Customer needs should be considered while offering products based on their financial circumstances.
• Privacy Rights: Sensitive and personal information of the customer must be confidential unless consent is given by that individual or is required by law. Customers have the right to protection against any infringement of their privacy.
• Redressal Rights: Customers have a valid right for making the banking service providers accountable and liable for their services and to be informed of the provider's policy regarding their rights and duties in case of grievances.

Redressal Agencies

Not only have authorities mandated ex-post redress options for customer complaints, but they have also mandated ex-ante approaches. Each Indian regulator has established its own grievance redressal procedure, adhering to the country's sectorial approach to resolving complaints. The following table[12] details the structure of the redressal mechanism:

District Forums, State Consumer Disputes Redressal Commissions, and the National Consumer Disputes Redressal Commission make up three tiers of  Court's redressal organizational structure.[13] For flaws in goods and/or deficiencies in service, a written complaint can be submitted with the District Consumer Forum for monetary value up to Rupees twenty lakh, with the State Commission for value up to Rupees one crore, and with the National Commission for value over Rupees one crore. For a complaint, appeal or petition to be filed by an individual under this act, only a small filling fee is required.

The Competition Commission[14] of India is only one example of an alternative regulatory body that consumers have tried to use to their advantage. In one case involving mortgages, it was claimed that banks' practices of penalizing borrowers for prepaying their loans amounted to an abusive use of their market power and constituted a kind of cartelization.[15] Although though the CCI ruled that banks did not act in concert or agreement when they assessed prepayment fees, and that the practice had no discernible impact on competition, it is worth noting that the CCI did review this particular issue.

Conclusion

Dr. Raghuram Rajan[16] announced in February, 2014 at the "Annual Banking Ombudsmen[17] Conference” that the Reserve Bank of India would be conducting undercover visitations at the financial institutions to assess the standard operating procedure for handling customer complaints. As a second point of emphasis, he mentioned the Charter of Customer Rights, saying that the Reserve Bank of India (RBI) will be conducting reviews of its implementation. Finally, he pushed for a system of resolving customer complaints within financial institutions. He also mentioned how high-level automation can help lower the price of addressing consumer complaints and make it possible for them to do so whenever and wherever they choose.

Financial service providers should pay extra attention to consumers who fall into certain categories, such as the elderly, the young, or the vulnerable. The next area where reform may be introduced is in the realm of online transactions, where a set of rules governing everything from how complaints are handled to who is responsible for damages would be welcome. It is also important to spread financial education. When it comes to safeguarding customers' bank accounts, raising public financial literacy is a top issue on the global stage. Workers at all levels of an organization, including upper management, It is very clear that the management as well as the general public shift their mindsets to prioritize consumer safety and this is the need of the hour.

[1] Mukherjee, Utsav, Banking Services and Consumer Laws (June 2008).

http://dx.doi.org/10.2139/ssrn.1143827

[2] Financial Sector Legislative Reforms Commission, set up by Ministry of Finance in 2011.

[3] Consumer Protection Act, 2019.

[4] Set up in February 2006.

[5] Punjab and Sind Bank v. Manpreet Singh, 1993 IVAD Delhi 753

[6] Reserve Bank of India (2005): Report on Trend and Progress of Banking in India 2004-2005, RBI: Mumbai.

[7] Koeva, P. (2003), “The Performance of Indian Banks During Financial Liberalization”, IMF Working Paper No.150, Washington DC

[8] Banking Codes and Standards Board of India.                    

[9] Shaktikanta das, 'Excellence in Customer Service in the Changing Paradigm of Financial Services - Shaktikanta Das' (RBI Bullitin, Nov 18, 2022) <https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=21393>

[10] Right to equality under article 14 of the Constitution of India, 1950.

[11] 'RTI Disclosures of Common Interest' (RBI Bullitin) <https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=624>

[12] Rentala, Raghavendra Rao. (2022). A Study on Consumer Protection Framework in Indian Financial Sector, pg. 1617.

[13] Redressal Agencies under Consumer Protection Act, 2019.

[14] The Competition Act, 2002.

[15] Sasidharan v. Branch Manager, Syndicate Bank [1991 (1) CCC 97 (NS)].

[16] 23rd Governor of Reserve Bank of India, (RBI).

[17] Alpana Killawala, 'Annual Conference of Banking Ombudsmen 2014' (Press Releases RBI, Jan 31, 2014) <https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30531>