BCSBI CONFERENCE FOR PRINCIPAL CODE COMPLIANCE OFFICERS

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