RBI plans radical overhaul of customer protection norms

In measures aimed at protecting banking consumers, the Reserve Bank 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).

The current system of regulations that govern sale of financial products and services is based on caveat emptor as a doctrine, added 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 has led to fundamental flaws in the customer protection architecture and has created large welfare losses for customers.

Explaining further, Joshi said the caveat venditor principle is a counter to caveat emptor and suggests that seller (banks) can 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," Joshi said.

Caveat venditor vests 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'. Joshi said once the codes are being set, it will 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.