Reserve Bank hints at stricter customer protection norms

The Reserve Bank of India (RBI) is in the process of formulating strict guidelines to discourage lenders from mis-selling and to hold them accountable for all products they are offering.

“From the principle of ‘caveat emptor’, Latin for ‘buyer beware’, we have to move to the principle ‘caveat venditor’, Latin for ‘seller beware.’ We are going to have the principal of caveat venditor and are going to formulate the codes for it,” RBI Executive Director Deepali Pant Joshi said on Tuesday addressing the annual conference of the Banking Codes and Standards Board of India (BCSBI) here.

The current system of regulations that governed sale of financial products and services was based on caveat emptor as a doctrine, added Ms. Joshi, who handles the departments of customer service, rural planning and credit at the RBI.

The recent Nachiket Mor panel report on ‘Comprehensive financial services for small businesses and low-income households’ had said that the caveat emptor principle had led to fundamental flaws in the customer protection architecture and had created large welfare losses for customers.

Explaining further, she said the caveat venditor principle was a counter to caveat emptor and suggests that seller (banks) could also be deceived in a market transaction.

“This forces the seller to take responsibility for the product and discourages the seller from selling the products of inferior quality,” Ms. Joshi said.

Caveat venditor vested the burden of effort of proving that the shortcoming deficiency of service was absent on the seller of the product, she added.

The Mor report had also suggested that there was a need to move to a customer protection regime where the provider is held accountable for the service sold to the buyer, by ascertaining that the products sold or the advice given was suitable for the buyer considering her needs and current financial situation, that is to the customer must have a ‘right to suitability’

Ms. Joshi said once the codes were being set, it would be mandatory for all banks to adhere to them.

The framework governing customer protection should consist of fairness; transparency of rules and conditions; suitability of products that matches customer needs, ability to repay; existence of a grievance redress process; clear specifications of liability if things go wrong; simplicity of the product and duty to inform about the changes in the product.

“We need to enshrine these principles in the customer’s charter of rights and duties of banks towards their customers. So, caveat venditor will necessitate these,” she said.

Ms. Joshi said public sector banks had to improve customer services across all spheres and particularly in areas related to deposits accounts, loans, pensions and failure of commitments made under the BCSBI codes.

In addition, services related to credit and debit cards, which have been subject to frequent complaints, need to be improved across all banks group.

According to the category-wise data on complaints sourced from banking ombudsmen in 2012-13, majority were regarding ATM cards (25 per cent), followed by non-observance of the fair practices code (16 per cent), she said.

Complaints received regarding loans and advances were 9 per cent, failure of commitment made under the BCSBI at 9 per cent and deposit accounts was 6 per cent.

“I find that there are several violations of the BCSBI codes. This is not a situation of comfort for the RBI and difficult to comprehend as the banks have voluntarily accepted the codes formulated by BCSBI,” she noted.