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About Financial consumer protection (FCP)

Context

  • The article focuses on the revised G20/OECD draft of the 2011 High-level Principles on Financial Consumer Protection (FCP) and new FCP themes that have been endorsed for the first time.
  • It emphasised that India must set a good example for others and will implement the revised principles when it assumes the G20 presidency in December 2023.

Relevance

GS Paper 2: Bilateral, regional and global groupings involving India and affecting India’s interests etc

Mains Question

The long sustained image of India as a leader of the oppressed and marginalized nations has disappeared on account of its newfound role in the emerging global order.’ Elaborate. (UPSC 2019)


About Financial consumer protection (FCP)

  • It refers to the overall framework of laws, regulations, and other measures aimed at ensuring fair and responsible treatment of financial consumers in their purchases and use of financial products and services, as well as their interactions with financial service providers.

Concerning the G20/OECD High-Level Principles on FCP

  • Background: These were created as part of the Organization for Economic Co-operation and Development’s (OECD) strategic response to the global financial crisis, with the goal of improving financial consumer protection.
    • These Principles were endorsed by G20 Leaders in 2011 and adopted by the OECD Council in 2012, and they are also included in the Financial Stability Board’s (“FSB”) Compendium of Standards.
  • Applicability: As a high-level standard, these Principles are specifically designed to be applicable to any jurisdiction and are cross-sectoral in nature (i.e. they can be applied to credit, banking, payments, insurance, pensions and investment sectors).
  • Importance: The Principles are the leading international standard for comprehensive and effective financial consumer protection.

FCP principles are being updated.

  • Need: The proposed 2022 revisions to the FCP Principles take into account developments such as the impact, opportunities, and risks for consumers associated with digitalization, sustainable finance, financial well-being, and the lessons learned from responding to the COVID-19 pandemic.
  • Themes: These principles address three interconnected themes: financial well-being, digitalization, and sustainable finance.
  • New Principles: In 2022, two new principles were added: access and inclusion and quality financial products.
  • Recommendations:
    • Regulatory oversight: The updated principles also advise regulators to intervene in certain high-risk products, cultivate appropriate firm culture, and use behavioural insights to improve consumer outcomes.
    • Vulnerable consumer protection: The new FCP regime calls for incorporating lessons and policy implications from the COVID-19 pandemic as appropriate, such as references to vulnerable consumers and financial scams.

The importance of financial well-being in the revised FCP

  • Concerning financial well-being: It refers to having control, feeling secure, and having freedom over one’s own current and future financial situation.
  • Financial well-being in an ideal FCP regime: FCP policies must contribute to consumers’ overall financial well-being and resilience, as well as ensure adequate and simple disclosures to consumers.
  • How can financial security be attained?
    • By establishing service providers’ accountability: Financial service providers should provide clear, accurate, reliable, comparable, easily accessible, and timely written information on the financial products and services they offer. Standardised precontractual disclosure practises should be adopted, allowing comparison of similar products and services.
    • Oversight approach: This should aim to realise the potential benefits of innovative business approaches to financial consumers while maintaining an appropriate level of financial consumer protection.
  • Different countries’ recognition status: o Countries such as the United Kingdom and New Zealand have introduced guidelines to identify and treat “vulnerable financial consumers” fairly.
    • However, because India does not currently recognise this concept, regulators such as SEBI require certain financial service providers to assess customer suitability and conduct risk profiling prior to providing services.
  • However, in the face of challenges such as financial illiteracy and economic hardship, it may be worthwhile to consider.

Updating FCP principles

  • Need: o Technological advancements: FCP must consider the impact, opportunities, and risks of digitalization for financial consumers as the number of digital channels increases and the use of artificial intelligence, machine learning technology, and algorithms increases.
    • Grievance redressal: As the number of UPI transactions grows, so do concerns about resolving grievances against payment service providers and the largely unregulated status of cryptocurrencies.
  • The Indian case – RBI guidelines on digital lending: These guidelines required entities that provide digital lending services to have a grievance redress officer, to evaluate a borrower’s creditworthiness before extending credit, and to allow a borrower to exit without penalty.

FCP’s sustainable finance

  • ESG integration in finance: In response to rising consumer demand for long-term financial investments, financial service providers are incorporating environmental, social, and governance (ESG) considerations into their operations, products, and services.
    • However, the FCP recommends increased transparency for financial consumers about the impact, opportunities, and risks of sustainable finance in order to help them make informed decisions.
  • In India, the SEBI has changed its name from “business responsibility reporting” to “business responsibility and sustainability reporting” (BRSR) in order to promote responsible corporate governance in the face of climate change.
    • Mandatory reporting: Under BRSR, eligible companies must provide ESG-related disclosures, including a sustainability performance report.
    • This enables investors to make an informed decision, and similar disclosures should be implemented in other market segments.
  • Concerns about “greenwashing” were also raised in an expert report presented at COP27.

Concerning Greenwashing

  • Greenwashing is the practise of making false claims to mislead consumers into believing that a company’s products are more environmentally friendly or have a greater positive environmental impact than they actually do.
  • Associated risks: Because many of these claims are unverifiable, dubious, and may help boost the entity’s image and garner benefits for it, it paves the way for the world to descend into climate disaster.
  • Case in point: The Volkswagen scandal, in which the German automaker was found to have cheated in emissions testing of its ostensibly green diesel vehicles, was an example of greenwashing.
  • Prevention: Financial regulators must ensure that corporations do not mislead consumers by making false claims about their progress toward climate targets.

Conclusion

  • The current regulatory landscape is sectoral and fragmented, which leads to regulatory arbitrage.
  • All actors seeking to innovate and compete in FinTech, including incumbent banks, FinTech start-ups, and BigTech corporations, should be subject to the same regulatory constraints and oversight.
  • As a result, an effective regulatory regime is required to prevent the emergence of regulatory gaps that may arise as a result of the appearance of new service providers, innovative products, and so on.
  • As more people enter financial markets (as highlighted by the RBI’s financial inclusion index), adopting revised FCP may be a good option.

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