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BCSBI CONFERENCE FOR PRINCIPAL CODE COMPLIANCE OFFICERS

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BCSBI CONFERENCE FOR PRINCIPAL CODE COMPLIANCE OFFICERS

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  1. BCSBI CONFERENCE FOR PRINCIPAL CODE COMPLIANCE OFFICERS CONSUMER PROTECTION AND MARKET CONDUCT REGULATION K.C.CHAKRABARTY Deputy Governor Reserve Bank of India APRIL 29, 2013

  2. Agenda • Issues in Financial Consumer Protection • Market Conduct – Regulatory and Consumer Protection Concerns • Customers’ Right to Fair Treatment • Are customers being treated fairly? – some examples • Implications of banks’ conduct on economic and social order • Twin Peaks Model –Objectives, Global experience, India • Conclusion

  3. FINANCIAL CONSUMER PROTECTION – ISSUES

  4. REGULATOR’S CONCERNS • Mis-selling of products and services- Misleading advertisements, unsolicited products, forced bundling • Transparency and Disclosure – Complex terms and conditions, Non-disclosure of penal provisions, hidden fees and charges, usurious penal charges • Consumer Education – Lack of awareness of MITCs, poor customer responsibility • Collecting Dues – Harassment/ Intimidation, conduct of recovery agents • No. of customers approaching BOs still high, indicating inadequacy of banks’ internal redressal systems

  5. CHALLENGES & TRENDS IN CONSUMER PROTECTION • Product proliferation in the name of innovation- Structured products, derivatives • Increase in virtual and cross-border transactions • Imbalances in bargaining power • Segregation of consumer protection and market conduct issues from prudential regulation • Treating Customers Fairly (TCF)

  6. CONSUMERS’ RIGHT TO FAIR TREATMENT • What is TCF - Consumers understand the features, benefits, risks and costs of products they buy and the services they use - Transparent and non-discriminatory pricing • TCF characteristics: • access to adequate, comparable information • honest and ethical dealings • effective, responsive and robust grievance redressal system • appropriate advice on suitability of products

  7. REGULATORY FOCUS ON FAIR TREATMENT OF CUSTOMERS THROUGH PRODUCT LIFE -CYCLE

  8. ARE CONSUMERS BEING TREATED FAIRLY ? • Bundling of insurance with bank’s regular products • Perverse incentive structures encourage mis-selling-Sale targets for front desk staff! • Floating interest rates – Sticky on the downside ! • Wide variation in interest rates charged for retail loans- Customers discriminated in spite of similar risk profile • Discrimination in rates offered to old and new customers with identical risk profiles • Discount on rate of interest charged during festivals • Charges for not providing services - Non-maintenance of minimum balance - Charges for no transaction in accounts - Prepayment penalty

  9. SOCIO- ECONOMIC FALLOUT OF IMPROPER MARKET CONDUCT • Banks might meet legal and regulatory prescriptions but whether their market conduct is in tune with wider socio-economic interest - Lending against the security of gold (why it should not be treated as consumption loan) - Opening of accounts of MLM companies and allowing transactions • Cobrapost episode: -Staff facilitating tax evasion through splitting of transactions -Customers allotted multiple IDs, even within the same branch - Laxity in CTR/STR reporting - Sale of third party products/gold coins at branches – Without KYC • Lack of follow up on export bills sent for collection – implications for CAD • Large ‘unhedged forex exposures’ of corporates– implications for individual banks and for systemic stability

  10. CASE FOR TWIN PEAKS REGULATORY ARCHITECTURE • Segregating prudential regulation from market conduct regulation – Institutional solvency and systemic stability does not ensure consumer protection • Growing recognition that institution-based structures are becoming irrelevant - Changes in industry characteristics - Changes in product characteristics • Neither institutional nor functional approaches were/ are adequate • Problem of scarce specialist skills – supervisory and regulatory

  11. CHANGING PROFILE OF FINANCIAL SERVICES INDUSTRY • Emergence of financial conglomerates – growing size and numbers • Abolition of barriers/ restrictions on investment/ commercial banking combinations • Bank- insurance linkages becoming commonplace • Need for a “group-wide” perspective for monitoring prudential soundness

  12. CHANGING PRODUCTS PROFILE • New/ innovative products that overlap conventional deposit/ insurance/ securities boundaries • Credit default swaps – are they exposure in terms of credit or insurance ? • Problems posed in the area of consumer protection – who regulates which product ? • Systemic issues – OTC derivative markets increased the interconnectedness of institutions, banks and non-banks

  13. TWIN PEAKS MODEL - OBJECTIVES • Functional Specialization • Optimum and efficient use of resources • Ensuring accountability • Avoiding comprehensive single point regulatory lapses and systemic failures • Standardized KYC requirements-Remove irritation of multiple KYC requirements

  14. PRUDENTIAL REGULATION • Objective - ensure safety and soundness of individual entities and overall financial stability (Systemic stability concerns) • Focus on large financial entities including financial conglomerates • Tools used include stipulation of liquidity and solvency requirements and regulation of the payment system

  15. MARKET CONDUCT REGULATION • How firms conduct their business, design and price their products, treat their consumers - Banks financing speculative products (Gold, Equity) - Banks receiving commission/ fees from dealers/ suppliers • Whether banks’ activities are in national/societal interests • Objective is to secure consumer protection, improve market confidence, promote access to financial services and protect the system from financial crimes • Tools include prescribing standards and codes, monitoring performance against these codes

  16. CROSS COUNTRY EXPERIENCE • Early Proponents : Australia (1997)- APRA as prudential regulator and Australian Securities & Investment Commission as market conduct regulator; Netherlands (2002) • UK moved to twin peaks model on April 1, 2013 with creation of separate Prudential Regulatory Authority and Financial Conduct Authority for market conduct • Several European nations such as Belgium, France, Portugal, Italy, etc. moved to twin peaks architecture in some form • Both Australia and Netherlands relatively less affected by the financial crisis.

  17. TWIN PEAKS MODEL IN INDIAN CONTEXT • Multiplicity of functional regulators(RBI, SEBI, IRDA, PFRDA) with diverse objectives • RBI, SEBI, IRDA and PFRDA have entered into a MOU for better monitoring of FCs –More of a financial stability objective • Other agencies like MCA, BCSBI, Consumer and civil courts also exist – Consumer protection and fair market conduct have remained peripheral agenda • Separate regulator could increase compliance burden on banks and increase compliance costs. • Higher costs could impact financial inclusion efforts

  18. EXPECTATIONS FROM BANKS/PCCOs • Some concerns expressed during last PCCO Conference still very pertinent- faulty incentive models for selling insurance/MF products, vulnerability of customers' rights in electronic banking transactions, etc. • Banks to go beyond the BCSBI mandated Codes and develop their own Code of Conduct • Self-regulation by institutions necessary so as to avoid stringent regulation

  19. CONCLUSION • Fair Treatment to Consumers not ingrained in the ethics and culture of financial institutions in India • Conduct of banks not in the best of economic and societal interests • Need to nurture a culture of fair treatment to customers – A Board/Top Management driven change in outlook necessary – If customers are not happy, institutions can’t survive • Need to recognize that market conduct and consumer protection essential for financial stability as well - Banks have to act as agents of change – for ending the social divide and discrimination against the poor and the vulnerable sections • BCSBI and the PCCOs have an important role to play

  20. CONCLUSION.. .contd. • Following the Crisis, conduct of financial institutions is under increased social scrutiny • If banks are not customer centric, society will demand change to a twin peaks approach leading to greater compliance burden and costs • Hence, it is in banks’ own interests to demonstrably prove their concern for the consumers and the society through fair treatment to consumers and efficient market conduct.

  21. THANK YOU