Customer Protection in Banks in India – A regulatory perspective

Customer Protection in Banks in India – A regulatory perspective

• Introduction 

The words ‘customer protection’ have gained substantial attention in recent times considering the enhanced focus of regulators across the globe on the financial safety and security of customers while carrying out transactions, especially in Banks. Customer protection stands for measures undertaken by the Reserve Bank of India (RBI) such as comprehensive disclosure requirements, suitability and appropriateness of the products, etc.

The role of RBI is crucial in customer protection as it acts as a regulator for protecting the interest of the depositors. The Banking Regulations Act, 1949 interalia entrusts powers to RBI which were intended to be exercised keeping the depositor’s interest in mind. With the advent of new product features by the Banks, which are more than just collecting deposits also with the use of comprehensive technology, it has become tough for the regulator to protect the interest of the customers and provide timely financial education and empower them to get redressed in a time bound manner.

RBI has been spearheading the campaign of customer protection by re-enforcing the financial literacy programs with a view to cope with the recent digitization drive undertaken by the Government especially the use of payment systems such as UPI, BHIM, Aadhaar Pay, etc.

• Why is Customer protection a must?

 In the past, there had been challenges for the RBI to keep the focus of financial institutions like Banks, and NBFCs on customer protection without impacting or creating distress in the system. There had been various instances of customer protection failures in the Indian banking environment. It was observed that incentives to staff in banks for selling mutual funds/insurance have resulted in the miss-selling of financial products. Further, it also created customer inconvenience and product suitability issues in the banking industry.

Likewise, in the loan segment, it was observed that banks started giving home loans under teaser rates (where in the initial few years’ rate of interest is lower and later on is re-set at a higher rate). This type of product feature created stress to the borrowers in the later period when the rate of interest is re-set for a higher rate which resulted in an increase in the EMI for the customer, without keeping the fact of repayment capabilities of the customer.

Keeping the above past incidents in mind, it appears to be a prominent problem that should be addressed to save guard the interest of the customer in the form of stringent customer protection initiatives.

• Customer protection globally?

 In the global scenario, a country like Hong Kong has industry established Code of Banking Practice (COBP) which promotes good standards and fair dealing with customers. The Hong Kong Monetary Authority (HKMA) requires Banks in Hong Kong to comply with COBP which is in turn reviewed as part of HKMA’s regulatory review process.

In the USA, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Consumer Financial Protection Bureau (CFPB) to protect the interest of the customers. Along similar lines, in the UK, the Financial Services Act, of 2002 set up the Financial Conduct Authority (FCA) which is responsible for regulating the consumer credit industry. FCA is a supervisory authority in the UK to ensure that customers are treated fairly and competition is healthy amongst financial institutions.

There has been constant growth of customer protection regimes across the globe.

• Customer protection initiatives by RBI

 RBI has been taking initiatives on customer protection and customer service in Banks in the form of formulation of various committees which had recommended various reformative steps towards better customer service and customer protection.

RBI has also set up the Banking Codes and Standards Board of India (BCSBI) as an autonomous body for improving the customer service aspects of the Banks in India. BSCBI has issued the following two codes which are adopted by the Banks to safeguard and protect the interest of the customers. Their codes are:

• Code of Bank’s Commitment to Customers
• Code of Bank’s Commitment to Micro and Small Enterprises

These codes provide protection to customers and explain how banks are expected to deal with customers in their day-to-day operations.

In recent times, RBI has put up a Charter of Customer Rights in the public domain and had asked banks to adapt and implement the same after its Board’s approval. The Charter of Customer Rights enshrines Broad, overarching principles for the protection of customers and has five basic rights of the customer viz.

• Right to Fair Treatment
• Right to Transparency, Fair and Honest Dealing
• Right to Suitability
• Right to Privacy and
• Right to Grievance Redress and Compensation

These rights in a way lay the foundation stone for the protection of customer rights by banks.

Further, RBI has also issued guidelines on the Fair Practice Code for Lenders which needs to be adopted by the banks with their Board approval incorporating tenants of fair lending and disclosures to the customer.

In order to educate the customer and to create awareness amongst the general public, RBI has instructed Banks to conduct Financial Literacy Camps covering branches in rural areas to ensure that awareness about digital financial products such as USSD, UPI, and BHIM, Aadhaar Pay be created. These steps of RBI enhance customer protection for the customer in the world of digitization.

As one of the approaches to customer protection, RBI has stipulated redressal mechanisms for customer complaints which are implemented through in-house grievance redressal mechanisms set up by Banks as per RBI guidelines and supplemented by the office of the internal Ombudsman created by Banks as per mandates by RBI/BCSBI and office of the Ombudsman created by RBI under the Banking Ombudsman Scheme.

 RBI has been implementing customer protection through various measures as above keeping pace with the developments globally.

 Recent developments in Customer protection by RBI

 In order to give impetus to financial literacy and customer protection and due to the recent surge in customer grievances relating to unauthorized transactions, RBI has issued guidelines on limiting the liability of customers in Unauthorised Electronic Banking Transactions. These guidelines are towards better customer protection and limiting customers’ liability to a greater extent if responded on time.

As per the guidelines, banks are required to mandatorily register customers for SMS alerts and wherever available register for e-mail alerts for electronic banking transactions. Electronic Banking Transaction would include transactions carried out through ATMs, POS, Internet Banking, Mobile Banking, Card Not Present transactions, PPI, etc. The SMS alerts shall mandatorily be sent to the customers, while email alerts may be sent, wherever registered. The customers must be advised to notify their bank of any unauthorized electronic banking transaction at the earliest after the occurrence of such transaction and informed that the longer the time is taken to notify the bank, the higher will be the risk of loss to the bank/ customer.

To facilitate this, banks are also required to provide customers with 24×7 access through multiple channels (at a minimum, via the website, phone banking, SMS, e-mail, IVR, a dedicated toll-free helpline, reporting to home branch, etc.) for reporting unauthorized transactions that have taken place and/ or loss or theft of payment instruments.

Banks are also required to enable customers to instantly respond by “Reply” to the SMS and e-mail alerts and the customers should not be required to search for a web page or an e-mail address to notify the objection, if any. Further, banks are required to provide a direct link for lodging the complaints, with a specific option to report unauthorized electronic transactions on the home page of its website.

The burden of proving customer liability in case of unauthorized electronic banking transactions will lie on the bank. These guidelines go a long way to explain the changing mindset of the regulator towards institutionalizing a better customer protection regime.

• Conclusion

While customer protection has been gaining wide coverage and weightage by the regulators across the globe, what is important is, constant awareness and education be provided to the customer (such as Financial Literacy Week observed in India, in the first week of June 2017) to create better customer protection environment.

With the gaining advance of retail business and payments system in India, it is quite important that the following areas be looked upon as improvement from customer service and protection standpoint:

• Creating awareness about the risk of unauthorized use of banking systems in a digital environment.
• Risk of miss-selling, lack of suitability of the product, lack of assessment of risk profile of the customer and offering the product.
• Strong grievance redressal mechanism in place to address the customer complaints emanating from recent technological offerings of the Bank.

At the outset, it would be the responsibility of Banks to create a conducive environment for the customers to be well informed about the products offered along with the recent developments in a technological environment. If Banks are able to demonstrate the same, then this will be considered as genuine customer protection.

Abhishek R Sharma (Views are Personal).

Important Note – The above article is also published in the IDFC Law Reporter 2017 (9th Edition)