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12 INTRODUCTION The financial sector across the globe consists of a wide range of entities
involved in the management, provision and distribution of wealth. This financial sector provides
financial products in terms of financial services which are intangible yet carry monetary value. The
entities involved in the financial sector include banks or banking companies, insurance companies,
stock brokers, consumer finance companies, investment banks and funds etc. The size of financial
sector in the overall economy of the world is considerable and technically speaking in USA, total
market capitalization consists of nearly 20% being represented by entities from financial sector
(Pond 2007). The financial sector generally provides the following services to its customers (The
changing shape of retail banking: Responding to Customer needs 1985); SCOPE The scope of this
essay is to understand the functioning of retail banking services provided by the commercial banks
across the globe and to establish what rights and protection which is available to the retail
customers against the banks in this scenario. Moreover, this essay is aimed at understanding
various rights that are available to retail customers under common laws and protection given by
specific legislations and industrial practices. ANALYSIS OF FINANCIAL SERVICES SECTOR The term
financial services came into wide use after Gramm-Leach-Bliley Act in late 1990s. This act enabled
various companies operating in US environment providing different financial services to customers,
to merge into each other or acquire another company while keeping the original products of the
company (Luisa Anderloni 2009). This resulted into development of such entities which provided a
number of financial services under the same roof previously provided by different entities such as
banking services, insurance services, investment advisory, fund and asset management etc. (R.
DeYoung 2008) STUDY OF CONSUMPTION OF FINANCIAL SERVICES IN RETAIL SECTOR With the
advancement in technology, financial services sectors initially restricted to national boundaries
moves across borders towards global locations. This resulted into formation of International
Financial Services Center (IFSC) in late 1990s. With the passage of time, the global financial sector
has shown major developments and now the total assets of banks in the international scenarios
are over $473 billion, net asset values of €810 billion in domiciled investment funds and cross-
border life insurance premiums amounting €15 billion (Pond 2007). There have been numerous
reasons for growth in the financial sector including opportunities to avail new profitable markets,
betterment in consumer relationships with improved technology, regulatory compliance and
principle-based approach, risk management at enterprise level, asset capture in retirement
markets (K. E. Dynan 2006). NEED FOR LEGISLATION AND PROTECTION & EXISTING
MECHANISMS FOR PROTECTION OF RETAIL CUSTOMERS With the increase in size and complexity
of financial services being offered to retail customers, there felt a need to device a framework that
must exist and be put into action in order to determine the responsibilities, rights, duties and
obligations of the parties who are involved in provisions and availing of financial services (Sciulli
1998). In the absence of any such regulatory framework, which determines the key features of
how financial services are likely to be provided and availed, there is a great risk that may it result
into default on account of common laws as well as the legislative structure that exists for
functioning of institutions and entities providing financial services (Merton 1992). However, it must
be noted that any protection that is to be provided to the consumers of retail banking must have
meet the following criteria (Merton 1992); ? The protection shall be consistent to the nature of
financial product under consideration, nature of consumer, infrastructure for provision of financial
services; ? It must not cause additional cost to gathering information by consumers; ? Roles
defined under prudential rules, Central Banks and country's legislative framework must not be
mis-interpreted. In addition to above, retail banking is characterized by the following main
features which make it different from other financial products adding complexity as well as need
for development of a protection mechanism (K. E. Dynan 2006); BIBLIOGRAPHY (UK), IOB 1992,
Banking World, illustrated edn, The University of Michigan, London. 1Campbell, J 2006, 'Household
Finance', Journal of Finance, vol 61, pp. 1553-1604. Das, DK 2003, An international Finance
reader, illustrated edn, Routledge. Divanna, JA 2004, The future of retail banking: delivering value
to global customers, Illustrated edn, Palgrave Macmillan, Ny. Goldring, J 1998, Consumer
Protection Law, 5th edn, Federation Press, NY. Julien Emoult, WHCW 2008, European Banking and
Financial Services Law, Third Edition edn, Larcier. K. E. Dynan, DWEDES 12006, 'Can Financial
Innovation Help to Explain the Reduced Votality of Economic Growth', Journal of Monetary
Economics, vol 53, pp. 123-150. Luisa Anderloni, DTLRHS 2009, Financial innovation in retail and
corporate banking, illustrated edn, Edward Elgar Publishing. Merton, RC 11992, 'Financial
Innovation and Economic Performance', Journal of Applied Corporate Finance, vol 4, pp. 12-22.
Peter Cartwright 1999, Consumer protection in financial services, Illustrated edn, Kluwer Law
International. Pond, K 2007, Retail Banking, #rd Illustrated edn, Lessons Professional Publishing,
NY. The changing shape of retail banking: Responding to Customer needs 1985, Illustrated edn,
Diane Publishing, NY. Treasury, H 2000, Cracking the Codes for Consumers, Banking Services
Consumers Code Review Group. ? ? ? Conservative regulation resulting into over-regulation;
Difficult interpretation of regulations and their ongoing changing nature; Entrenchment of existing
products by regulations. (Peter Cartwright 1999) With the development of concept of market from
1960s and 1970s (when the concept of market was limited to emphasis on competition, re-sale
price maintenance, information asymmetry etc) to the present era where markets are considered
in terms of policies, information cost, bargaining power, number of transactions etc, it became a
necessity to implant protection mechanisms in the retail banking available to consumers (R.
DeYoung 2008). The necessity of protection mechanism became obvious under the following
circumstances also (Campbell 2006); • High legal fees; • Prolonged periods for final decision; •
Misconduct by legal counselors; • Discrimination of courts against suppliers; and • Failure to
understand the financial product by courts in a newly developed market. Once the need for
protection mechanisms has been understood in detail, the major aspects that must be addressed
by the protection mechanisms being implanted into the financial services framework (K. E. Dynan
2006), are; ? ? ? ? The protection mechanisms shall be cheap and efficient and comprehensive to
cover simple as well as complex financial products; The protection mechanisms shall be imparted
from the basic level i.e. right from the point that consumer understands the facts about the
product they are going to buy. Such mechanism include key documents giving complete picture,
key ratios, important communication documents etc; Private sector intermediaries engaged
specially for information flow must be dealt and used in order to develop confidence and trust of
consumers. Such intermediaries include electronic and print media, rating agencies, financial
analysts etc; Risks must be dealt in light of prudential regulations so that systemic risk is
mitigated. implemented in the financial sector through policy intervention in terms of regulatory
framework under which financial institutions have to act. Such safeguards include minimum
cancellation rights (available to retail consumers under the regulatory framework in various
countries) which can be exercised when there has been ill-advice by sellers or adequate
information was not made available (K. E. Dynan 2006). The second powerful protection tool
available to retail consumers is Competition in the financial market. Promulgation and promotion of
competition is sometimes considered to be a paradox when viewed in terms of banking norms as it
is considered 1that more competition leads to more risk taking and higher default risk (Peter
Cartwright 1999). However, with promotion of competition, retail consumers are protected against
any mal practices of any one of the entities in financial sector as other offer similar products due
to which comparison becomes easy. This leads to a rational decision where consumer is not the
one who pays the cost (Julien Emoult 2008). Moreover, regulation and supervision is another
protection available to the retail consumers. The government intervention has been a superior
supervision as compared to market forces. Governments intervene in two ways, one by structuring
rights of retail consumers under common law and other by introduction of legislation specifically
addressing banking and financial sector. Thus, the retail consumer gets protected against the
possible threats either by the specific statute governing the financial sector or is covered under the
common law (Campbell 2006). Sciulli, LM 1998, Innovations in the retail banking industry: the
impact of organizational structure and environment on adoption process, revised edn, Garland
Pub, NY. 1 2 ? Banking services (deposits, loans, mortgages, credit, notary service, private
banking, retail banking etc); ? Foreign exchange services (consisting of currency exchange,
banking services in foreign currency, online or wire transfers etc); ? Investment services (including
asset management, fund management, hedges and custody services); ? Other services (including
financial advisory, equity management, Venture capital etc) (K. E. Dynan 2006) The financial
sector consists of the largest companies over the globe in terms of market capitalization as well as
in terms of earnings. Financial sector is a slow growing industry which in highly fragmented. Out of
the services provided by financial sector, retail banking is a banking service provided to mass
market consisting of individuals (as customers) that use local branches of commercial banks. In
other words, retail banking represents the transactions of banks with individuals excluding
corporations, companies, other banks etc. The services offered by the banks in retail banking
include accounts maintenance (current, savings or transactional), mortgages, loans, credit and
debit cards and such other related banking services (R. DeYoung 2008). 3 4 The range of financial
services which is provided by financial institutions in current scenario vary a lot from banking
services which include money deposits, checkbooks issues, mortgages (Treasury 2000),
commercial loans, credit cards, debit cards, ATM services, online fund transfers, overdraft
facilities, notary services, private banking, capital marketing in form of underwriting debt and
equity issues, raising structured finance etc, to foreign exchange services which include purchase
and sale of foreign and local currency, transactions in foreign currency, wire transfer in different
currencies over the globe (Peter Cartwright 1999), investment services including asset
management in terms of investment funds management, investment advisory, hedged fund
management, custodian services (secure keeping and transacting securities, portfolios etc),
Insurance services including insurance, reinsurance, insurance brokerage, insurance underwriting
in areas of marine, life, health, wealth, property, casualty, fire insurance and annuities and other
financial services such as advisory services, private equity raising, venture capital raising,
conglomerates, debt resolution, financial planning etc (Merton 1992). 5 Many countries across the
globe have moved from centralized planning to market based economies. Under such conditions,
protection of consumers becomes quite important in order to promote efficient and effective
financial markets and develop consumer confidence on the financial system of the country
(Goldring 1998). Moreover, increase in the household debt for example in Europe from 20% to
50% of GDP is a considerable change in the scenarios that most of such transactions had occurred
beyond the formal financial services channel (Merton 1992). 6 ? ? ? ? ? The need for differential
treatment of retail customers as compared to other financial products; Moral hazards related to
retail banking involving risk elevation; Fair competition in the market ensuring upright conduct;
Ease of understandability and comparison of financial products; Availability of legal recourse to
retail consumers; 7 In light of the above discussion a simple criteria for protection mechanism was
developed which states (Merton 1992); ? Transparency: Protection mechanism must be simple. It
must be clear so that it shall not add to consumer's cost of information gathering; ? Compatible:
Protection mechanism shall be devised not to distort the financial services market; ? Self
sustainable: Protection mechanism must place government intervention as the last resort and
emphasize on private sector mechanisms as much as possible; ? Redress: Protection mechanisms
must not be too costly for either suppliers for implementation or for consumers so that an average
consumer has easy access to it; ? Choice: Protection framework shall include ensuring that
consumers get appropriate knowledge of the different products from which they can choose
from; ? Privacy: Protection mechanisms must ensure the privacy requirements of the consumers.
8 A lot of work has been done by researchers to highlight the principles of consumer protection in
retail banking. There established two groups of experts one with a view that consumers need
protection against other parties such as hazardous products (possibly of the financial institution) or
misleading advertisement or aggressive sales strategies (Divanna 2004). While the other group
puts forth that consumers must be protected against themselves. It is often observed that in light
of adequate information, appropriate advices, availability of wide range of products, consumers
make wrong decisions which are not in favor of their long term objectives (Peter Cartwright 1999).
The situation is worsened by the fact that a wide range of financial products and services is
available to retail consumers whereas literacy in terms of financial sector is quite low and
households are totally inexperienced in making long term financial decisions. Such factors have
resulted into limited portfolio choice, low stock market participation, under-diversification, slow
refinancing behavior etc (Merton 1992). Thus, the very first protection mechanism that must exist
is "Availability of Perfect Information". Although, this is a relative term, however, due to lower
literacy rates of consumers towards financial services sector, availability of perfect information is a
necessity. Moreover, variety of product range in financial services has also mandated it (Julien
Emoult 2008). This is 9 In addition to above, many researchers classify innovation in the financial
services sector is itself a protection available to the retail consumers (Divanna 2004). Innovations
lead to a process where the financial institutions experiment marketing of the most demanded
production. Thus, their favorite products are shaped into more attractive ones. However, it must
be kept in mind, not every new contract or product launched by the financial institutions is in favor
of customers (Merton 1992). A more direct protection exists in terms of directives, regulations,
laws or policy statements issued by the governing authority (such as central banks) or legislations
made by the legislative 10 body of the central government provide a direct protection to the retail
consumers (R. DeYoung 2008). CONCLUSION In the current scenario of financial crises that is
prevailing across the globe, consumer protection is being considered as a primary issue to restore
the financial sector which has been the main effectee of such crises. It is the consumer protection
that can restore the stability of the financial sector by developing consumers' confidence onto the
services being offered by the financial sector. It is only in this way, that the rapid decline in this
sector can be appropriately dealt and growth trend can be attained. Consumer protection not only
tends to affect positively by improving consumer confidence but also reduced the underlying
financial risks by building trust. In banks, for instance, such confidence will result into elevated
deposits being made by the consumers. The protection mechanisms must promote and focus on
increasing financial literacy among the consumers as the institutions providing financial services
know their services well, however the people, such as retail consumers who have to use those
products posses little knowledge (Das 2003). The situation is worsened by the fact that some
financial products are so complex that they cannot be clearly understood by a household even if
complete information is being given. Moreover, each government and regulatory bodies try to
develop a framework where confidence, trust and reliance is being placed upon by customers
(including retail consumers) on the financial sector of the country. This not only ensures the
existence and growth of the financial sector itself but also of the whole economy ((UK) 1992). 11
R. DeYoung, WCFDGDPMPN 2008, 'Coomercial 1Lending Distance and Historically Underserved
Areas', Journal of Ecnomics and Business, vol 60, pp. 149-164.