New Delhi: In his Budget Speech of 2015-16, the Union Minister of Finance and Corporate Affairs Shri Arun Jaitley hadannounced the creation a sector-neutral Financial Redressal Agency (FRA) to address the grievances of retailconsumers against all Financial Service Providers (FSPs). This follows from the recommendations of theFinancial Sector Legislative Reforms Commission (FSLRC), which had, in 2013, recommended FRA as partof the Regulatory Framework designed to foster customer protection and independence and accountability ofRegulators. The Task Force, constituted in June, 2015 as part of the preparatory work for FRA, had submittedits Report on June 30, 2016. The Central Government now invites the comments of stakeholders and public on the Report of the Financial Redressal Agency by 31st January 2017.
Report of the Task Force
The Task Force found that the current framework offers only sub-optimal outcomes for consumers, forreasons which include the following:
- Varying approach, processes, capacity, service levels and powers to redress complaints. The averageconsumer is put under unnecessary stress when required to approach different redress agencies based on the nature of the product. This stress is further amplified due to varying levels of consumer protectionacross regulators.
- Inadequacy in powers to handle all categories of complaints. In some instances, regulated FSPs are notcovered within the scope of the concerned regulator’s redress functions. Further, there is a lack ofpowers to award compensation in some cases, pushing consumers to courts/ consumer forums.
- Little room for specialisation as present systems do not have a specialised cadre of redressprofessionals.
- Possible conflict in role. A large number of complaints on a particular issue could reflect regulatoryand supervisory gaps. It would help if feedback from complaints flows to the regulator through anindependent mechanism. In addition, tasking regulators with resolving individual retail complaintstakes away their resources for discharging core supervisory functions.
Design of the FRA
- FRA design offers a simplified resolution process, allowing retail consumers in distant and remotelocations to pursue effective remedies against FSP, without imposing significant costs on them. It willtry to resolve all complaints through mediation. Cases where the parties are unable to reach asettlement would be resolved through a light-touch adjudication process. It will discourage court-likeprocesses. The FRA will establish a front-end presence in diverse locations for consumers to submitcomplaints.
- The remedies awarded by the FRA may include (i) directions to the FSP to take remedial steps; and(ii) payment of compensation.
- The accountability of FRA will be ensured through robust requirements on disclosure and performancereview. FRA will provide an independent feedback loop to regulators on complaints, includinginformation on complaints received against unregulated FSPs, with a view to assisting them instrengthening consumer protection regulation and supervision.
- Consumers will be able to appeal against the orders of FRA at Securities Appellate Tribunal(SAT). This would standardise the availability of such an independent mechanism across thefinancial sector.
Organisational Design
FRA would be managed by a Board to the appointed by the financial regulators, in consultation with theGovernment of India (GOI). It would also have an Independent Assessment Officer to consider complaintsagainst the FRA’s redress function arising out of issues related to its standard of service. It would run anefficient process to manage vacancies.
New Financial Consumer Protection Redress Law
The Task Force has stressed that for the FRA, which represents the curative aspects of the consumerprotection, to be effective – the preventive aspects, to be implemented by the regulators, need to besimultaneously strengthened. It highlighted the need for basic protections (articulated by FSLRC) to beprovided for in law through a new financial consumer protection and redress legislation to (i) empowerFRA to provide redress; and (ii) strengthen preventive regulatory framework on consumer protection forimplementation by the regulators. This law should be created by adopting the relevant consumer protectionprovisions from the Indian Financial Code (IFC) 1.1.
Funding Requirement and Business Model
The Task Force has recommended an initial budget of about Rs.100 crore to operationalise the FRA.
The Task Force expects the proposed FRA to be largely cost neutral. The expected additional expenses overcurrent cost would largely flow towards improved access, effectiveness and speed of redress to the retailconsumers.
The Task Force has recommended that the regulators in consultation with the FRA should devise a model tolevy fees on the FSPs. These levies should be collected by the regulators as part of its existing mechanismson behalf of the FRA. The fee model should comprise of (i) a base flat fee, (ii) a variable fee based on thesize of the entity and (iii) Number of complaints against the entity and the stages at which the complaints areresolved. No fee should be charged to the consumer.
Implementation Steps
- Set-up a shell FRA through an executive order. Recruit the leadership and make the requisitebudgets available.
- Procure a Primary Consultant to assist in scaling-up the shell FRA.
- Empower a statutory FRA through a financial consumer protection and redress legislation. The TaskForce has recommended the following transition plan:
- Phase I – 3 months: Empower the FRA to redress complaints being handled by InsuranceRegulatory and Development Authority of India (IRDAI), Insurance Ombudsman, and PensionFund Regulatory and Development Authority (PFRDA).
- Phase II – 1 year : Empower FRA to redress complaints by retail consumers against FSPs regulatedby Securities and Exchange Board of India (SEBI) as well as retail complaints that are handled byReserve Bank of India (RBI) and Banking Ombudsman
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