Report of the Committee to recommend measures for curbing mis-selling in financial products

Deterring miss-selling of financial products

Protection of the rights of consumers of financial products is of paramount importance for the smooth functioning of an economy. This was evidenced during the sub-prime mortgage crisis in the US which caused a global economic meltdown. The mis-selling of certain mortgage products was one of the key contributors to the crisis.  In its aftermath, countries like US, UK and Hong Kong, among others, carried out a complete overhaul of their existing legal regimes on consumer protection for financial products, including mis-selling.

In India, customers who do not understand complicated financial products often fall victim to mis-selling tactics of companies and various intermediaries who are incentivized by remuneration structures linked to sales. 

In November, 2014, the government had setup a committee to evaluate the regulatory regime governing mis-selling, identify bottlenecks and suggest measures for reform. Vidhi was tasked with preparing a report for the Committee that outlined the regulatory hurdles and evaluated case law developments on consumer protection.  

The report noted that most financial sector regulators had their own procedures for licensing and registration of intermediaries, codes of conduct, and grievance redressal processes, which made the legal regime highly fragmented. It also described past instances of turf-wars between regulators over complex financial products which had various technical features. Such complexities also facilitated regulatory arbitrage and lowered consumer confidence in the financial sector, the report found. Among other measures, it recommended a single consolidated consumer protection regime for the entire financial sector. Given the multiplicity of judicial forums for financial products, it also recommended a unified redressal agency for all financial products.