By Vishnu Prasad, IFMR Finance Foundation
The previous post delineated the Indian context for finance and suitability as part of our Consumer Protection series. This post delves deeper into the conceptual discussions on suitability as the new paradigm for financial sector regulation in India.
Suitability as a process
It would be erroneous to think of suitability in the context of the intention of the financial services providers or customer outcomes. Instead, suitability should be seen as a process. As a part of this process, every financial services provider should be required to have a board approved suitability policy that the company must follow. This process must cover all aspects of consumer interactions, right from the time of enrolment, data collection and analysis, communication of recommendation or advice, and follow-up with consumers on recommendations made. The financial services provider needs to ensure through the ex-ante implementation of the suitability process that the design and sale of services meets the needs of the consumer. The financial services provider will be held accountable on the implementation of this process of “suitability”, and not the intentions of the provider or consumer outcomes.
It is in this view of “suitability”, as an on-going process that the provider implements in every interaction with every consumer (driven by the incentive of acting in the consumer’s best interests), that the true power of the “suitability” paradigm becomes apparent. The suitability policy can be legally challenged by regulators, consumers and consumer advocates and should be subject to regulatory audit and disclosure requirements.
In order for any framework of suitability to have teeth, there is a need for the imposition of legal liability on the financial services provider. The only way to incentivise the financial services provider to act in the best interest of the customer is to hold them legally responsible for the suitability process. In a “suitability” framework, it is in the firms’ self-interest that their behaviour in situations of conflicted remuneration and sales models will be aligned with the best interests of the consumer. . For instance, the threat of product recall in case of unsuitable behaviour provides a strong dis-incentive from mis-selling.
Further, in the face of binding legal liability, competition will drive each provider to differentiate itself as the purveyor of the most suitable products and services to consumers. To meet the qualitative dimensions of the suitability criterion, they will be induced to offer a higher quality of service through a combination of:
- Continuous product design to meet ever evolving consumer requirements;
- Tighter training of their agents and representatives to better assess consumer situation, needs and prescribe customised solutions; and
- Re-configuration of incentive structures so that the main criterion is the delivery of suitable service for the consumer, thus aligning provider’s incentives to those of the consumer.
The Consumer’s Right to Choose
It is important to clarify at this juncture that “suitability” does not compromise the right of the consumer to choose. The objective of “suitability” is to ensure that the financial services provider is always incentivised to act on the best interest of the consumer, not to ensure that the consumer abides by the advice of the provider.
In the suitability regime, every financial services provider will need to develop internal processes to assess and determine the suitability of their products for clients. On the basis of these internally developed processes, they will advise their clients on the appropriateness of products and services for them. At this point, it is completely up to the consumer to heed or reject the advice given – the final decision on accepting the advice and buying the product will always lie with the consumer. There can be no compromise on the fundamental right of consumers to choose the products and services they want to buy.
For every transaction where the consumer chooses to reject the advice of the financial services provider, she should be required to officially attest to the fact that she has been given expert advice that she has rejected. Beyond this, the financial services provider can then sell the product the consumer demands, and will not be held liable for “suitability”. Only in the case that the consumer accepts the provider’s expert advice and buys the products and services recommended will the provider be held liable under the “suitability” regime.
”Suitability” will drive financial services providers to act in the best interest of the consumer, thereby ensuring consumer protection, while the consumer will have the option to accept or reject the provider’s advice, thus safeguarding her autonomy.