Mis-selling of financial products is pervasive in India and across the world. Sound grievance redress systems are one path to ensuring a degree of consumer protection. For example, complaints by customers to the Financial Ombudsman Service in the UK on Payment Protection Insurance paved the way for redress.
Class-action suits are another important means of seeking redress. For example, Bank of America was accused of charging excessive overdraft fees. Consumers of the bank got paid USD 410 million in 2011 as a result of the class-action suit on this issue. J P Morgan also had to settle a case on similar allegations for USD 110 million. Citizen Bank agreed to pay USD 137.5 million.
In India, too, we have seen several instances of mis-selling. The sale of Yes Bank's risky AT1 bonds as guaranteed return bonds is a recent example. To the best of our knowledge, consumers have not initiated a class-action suit for any of the mis-selling episodes in India.
At best, courts have taken it upon themselves to grant a class-wide remedy. For example, in Dr Virendra Pal Kapoor v. Union of India and Ors, a senior citizen had invested INR 50,000 in a unit-linked product in 2007. Upon payout in 2012, he had lost the entire sum except INR 248 on account of hidden charges. He had been mis-sold the policy without any caution. The court declared the policy to be void. It also directed the regulator, the IRDAI, to re-examine all policies issued by the specific insurance provider. If it detected regulatory breaches, it was to wind up the business of the firm. The apex forum, however, dismissed the class remedy without offering a reason.
In this article, we examine the reason behind the lack of class action suits in India. We argue that this is because of two issues. First, the substantive law is not clear. This makes it difficult for class members to come together. Second, procedural issues limit the financing of such cases. The issues we raise are pertinent to all aspects of consumer protection: from health to the environment. In this article, we combine the general treatment of class action with features specific to financial consumer protection.
Why is class action important?
Civil litigation is important for two reasons. First, the threat of litigation serves as a deterrence from injuring others. Second, it provides insurance to the injured when deterrence has failed.
When claims are small, plaintiffs may not be able to undertake individual litigation. In such a case, the plaintiffs do not get a chance to seek a remedy. This collective action problem is solved using class action litigation. As Fitzpatrick, 2010 describes, class-action allows claims to get aggregated. This is especially important when parties do not enjoy an equal bargaining power, as is the case in consumer finance. Plaintiffs can share resources such as evidence, expert witnesses, and the costs of litigation. To the extent that class actions permit disputes to go forward that might not have done so individually, they provide the possibility of insurance to the plaintiffs. Class-action suits also help ultimate recoveries to be close to the cost of injuries. This is because plaintiffs can keep more of their awards for themselves.
The ability to go to courts for private resolution between different parties reduces the need for the administrative state. This is because if people can solve disputes in courts, the rationale for concentrating power in the hands of a regulator, and the subsequent creation of mini-states does not remain (Kelkar and Shah, 2019). Class action suits, thus, serve an important function over and beyond the relief that is made available through the suit.
Institutional framework required for class action suits
For class action to work, the institutional design has four pre-requisites.
- Identifying members: The first is the possibility to identify members of the class. The burden of identification is usually placed on the plaintiffs, which courts later certify. Identification is non-trivial and varies from case to case. Members connected through a transactional relationship are easier to identify. Fitzpatrick, 2010 showed that more than three-fourths of all class actions were based on cases where it was possible to identify the class by back tracing the contract. Identifying members aggrieved by mis-selling is thus easier than identifying those who have suffered health issues in an environmental dispute. Courts may have a concern about how a class has been identified. In this case, courts could allow the plaintiffs to draft a workable definition of members of the class. It need not be important to identify every single member at the time of certification. This determination can be made when new members join the suit.
- Aggregation of claims: The aggregated claims should represent a substantial portion of the full class (also termed as the adequacy of the class). This is because a class action by its very nature is "representative". The question of whether a suit represents a substantial portion does not have one easy answer. As a practical matter, courts should rarely need to worry about it. Few lawyers would want to waste their time pursuing class certification (with its hurdles) for a small number of claimants. Hence, the instances in which adequacy is a valid reason to reject the claim should be rare. If courts are unhappy about the adequacy of the class, they should allow plaintiffs to make a representation in this regard.
- Incentive alignment: In individual cases, clients approach the lawyer. In a class-action, it is more likely that lawyers solicit work from a class. Victims of a class seldom have much in common besides the injury. As a result, an informed referral process may not develop. The principals (the members of the class) may not be able to act as good monitors of the agent (the lawyer). The lawyer may have an incentive to engage in self-dealing (Lahav, 2003). Contingency fees solve the incentive problem by linking the lawyer's fees to the amount of benefit she provides to the class. This is especially important in consumer class actions where client cohesion is unusual.
- Meeting expenses: Lawsuits can be both expensive and risky. A class-action does not guarantee that members will be able to bear all expenses. Legal requirements may mean that members have to provide specific evidence individually. Litigation may also carry on for a long time leading to an increase in expenses. And it is always possible that members lose the suit. The legal system should allow expenses to be borne through "third-party funding". Contingency fees, discussed above is one element of it. A second element is raising finances from companies (such as Vanin Capital, IMF Bentham) specializing in investing in class-action litigation. If members win, they share their proceeds with the firm in return for financing the suit. The companies are in a better position to manage the risk of loss of the suit than class members.
The law in India
The Code of Civil Procedure, 1908 provides for representative suits where one or more persons can sue on behalf of all those who have a common interest or grievance. Such suits are also provided for under several other laws with varying scope. Shareholders and depositors may file a case for oppression and mismanagement under the Companies Act of 2013. Under the Consumer Protection Act, 1986, a consumer can file an action on behalf of all other interested consumers before a consumer court. A suit may also be filed under the Competition Act, 2002 to challenge anti-competitive agreements and market positions. The scheme of class actions suits may hence be summarized as follows:
| Law | Subject Matter | Class | Example |
|---|---|---|---|
| Code of Civil Procedure | There are no limits on the subject matter except for actions that cannot be filed in the civil courts at all, such as mismanagement suits. | Persons having the 'same interest' in the suit | Excess demand by housing board |
| Companies Act | A suit can only be brought for oppression and mismanagement of the company but does not include a banking company. | Shareholders and Depositors in the Company | Depriving shareholders of their right to dividends |
| Competition Act | A class may dispute an agreement which causes an appreciable adverse effect on competition within India or abuse of dominant position by an enterprise. | Any person, consumer, or their association | price-fixing, output limitation, market sharing, and bid-rigging |
| Consumer Protection Act | The suit is restricted to goods and services sold/provided or delivered or agreed to be sold/provided or delivered. | Consumers of the goods or services | Mis-selling of products by a banking or insurance company |
As the table shows, the subject matter and class depend on the law under which the suit is sought to be filed. However, there are two problems with this system:
- A Representative Class: Persons who approach the court in a class-action suit need to represent an adequate portion of the class. The National Consumer Dispute Redressal Commission (NCDRC) has said that it would not permit a case if only 10 persons out of a class of 100 wish to litigate. They argue that if they accept the case, the other 90 would have to either file individual complaints or file on behalf of another class (Ambrish Kumar Shukla v. Ferrous Infrastructure). One could, however, argue that the other 90 could always opt-in to the action already initiated, or the court could club matters if two class-actions are initiated. This standard is also difficult where the class is likely to be millions of customers. For example, consider a dispute between a bank and its million customers over fees charged by a bank. While 10 out of 100 injured parties may seem inadequate, it is hard to argue the same if 100,000 customers out of a million formed a class. This issue is not unique to consumer disputes. The Companies Act prescribes a high adequacy standard if shareholders want to initiate class actions for oppression or mismanagement. The class needs to include at least 5% or 100 shareholders of the company. This may be difficult to meet since such cases are usually filed by minority shareholders.
- The new Consumer Protection Law, 2019: India enacted a new consumer protection law in 2019. Unlike the erstwhile law which permitted a class to initiate a case before a consumer commission in cases of mis-selling, the 2019 law establishes a new regulator in the regime of consumer protection i.e. the Central Consumer Protection Authority (CCPA). The CCPA is tasked with protecting and enforcing the rights of consumers as a class. As per section 17 of the new Act, a complaint relating to violations of consumer rights prejudicial to the interests of consumers as a class is to be forwarded to the CCPA. It would then conduct a preliminary inquiry as to whether there exists a prima facie case of violation of consumer rights and instruct for an investigation to be conducted. This has taken away the power to initiate class actions from individuals and vested them into the hands of the regulator. Unlike earlier, where a class of consumers could approach consumer commissions with their common grievance, they are now required to meet the subjective satisfaction of the CCPA. This is then meant to result in an investigation, and consequent orders, if any. The difficulties of public management now impact the enforcement process in consumer grievances. Persons who have suffered harm are now supplicants before the regulator, requesting it to enforce consumer law. Several steps have been added in the process, which could lead to a lesser filing of class action suits.
Procedural and financial hindrances
Solving the substantive issues listed above will not lead to class-action suits. This is because of the incapacity of people to finance such disputes and regulations on how to do so.
- Stamp Duties: Litigation is expensive. One reason for this is the stamp duty payable for the same. Stamp duty is a tax on the value of instruments used in various business transactions. There are two kinds of stamp duties: (i) judicial stamp duties, and (ii) non-judicial stamp duties. Judicial stamp duties are fees collected from litigants in courts. These are best viewed as court fees and act as the cost of bringing an action. They may be prohibitive. For example, the fees payable in Delhi for a plaint (the first document submitted in court for a case) has been set at 4% of the value claimed. Fees are also to be paid in cases of review or appeals. There may be charges for obtaining copies, translations, additional applications, etc. The law of evidence requires the payment of non-judicial stamp duty for all documents submitted in court. These costs add up and would become prohibitive for a million customers. In a case like that of the Bank of America mentioned above, a claim for USD 410 million would need a fee of at least USD 16.4 million.
- Third-Party Funding: Third-party funding ("TPF") is the act of a party outside the litigation paying for its cost. If the litigation is successful, the party gets a share in the award. This becomes important on account of the increased costs of litigation. When parties are not able to afford the dispute themselves, they should be able to turn to third-parties for funding. In 2018, the Supreme Court in Bar Council of India v. AK Balaji noted that there was no limitation on third-party funding. The Code of Civil Procedure, as amended by some Indian states including Gujarat, Karnataka, Madhya Pradesh, and Maharashtra, explicitly recognizes the role of a financier of litigation costs of a plaintiff. It also sets out the circumstances when such a financier may be made a party to the dispute. However, there is no central law on TPF in India. As a result, there is considerable uncertainty on whether the courts will hold the TPF agreement as "just". As early as 1876, the court held in Ram Coomar Coondoo v. Chunder Canto Mookerjee that:
"agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefore, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, [the] effect ought not to be given to them."
Courts have left it to their own discretion to examine whether the financing agreement is just and fair. In the absence of statutory requirements, courts usually lay down legal tests to determine a question of law. This allows parties to predict the behavior of the courts and make appropriate arrangements. There are no tests to determine the appropriateness of TPF agreements. Their validity is entirely up to a judge's concept of just-ness, leading to the TPF market not evolving.
- Contingency Fees: Contingency fees is the fees of the legal counsel as a stake in the outcome. This is prohibited in India. This is problematic as lawyers do not have an incentive to argue unless their fees are paid. This means that fees must be paid upfront. A class action with a high claim is likely to be argued by a senior member of the bar. Appearance costs may be to the tune of INR 1.2 million. With an average of one hearing every two months, this would be INR 64.8 million (USD 850,000) for nine years (the average time of a civil case in India). Further, TPF funders usually seek contingency fees of legal counsel as this ensures alignment of interests. The lack of contingency fees also has an adverse effect on TPF.
Besides these reasons, India follows the loser-pays rule in litigation (Law Commission of India, 2012). The unsuccessful party is ordered to pay the costs to the successful party. There is some merit in this as it restricts vexatious litigation. But for class-actions, the class has to worry about paying the defendant's attorney's fees and adjoining costs if it loses the case, even though Indian courts award low costs (Law Commission of India, 2012).
Conclusion
The laws in India create a system which either prohibits or disincentives class actions. This article is not a definitive finding on how to cure such a situation; however, our analysis shows that the two reasons for the absence of class action in India require independent solutions.
To achieve a sound law on class action, two changes have to be brought to Indian legislation. Laws that allow for such suits may provide for what constitutes an adequate portion of the class to approach a court. Further, the new consumer protection law could give more clarity on what constitutes a prima facie case of violation of consumer rights and the elements of the investigation thereon. We need to explore the possibility of transitioning away from the loser-pays principle in class actions and toward contingency fees for lawyers and third-party investors.
These reforms have the potential to pave the way for class action suits in a wide range of areas. They are also an extremely important pillar in the system of grievance redress in consumer financial markets to protect millions of customers against egregious behavior by financial firms.
References
Ambrish Kumar Shukla & 21 Ors v. Ferrous Infrastructure Pvt Ltd, January 19 2016, NCDRC.
Bar Council of India v. AK Balaji, March 13 2018, Supreme Court of India.
Coral Gables, $137.5 Million Settlement Announced In Citizens Bank Overdraft Fee Class Action, Lexis Nexis.
Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.
Fitzpatrick, 2010, An empirical study of class action settlements and their fee awards. Journal of Empirical Legal Studies, 7 (4), pp 811-846.
Fitzpatrick, 2010, Do Class Action Lawyers Make Too Little?, University of Pennsylvania Law Review, 158 (7), pp 2043-2083.
Jonathan Stempel, BofA $410 million overdraft settlement wins court OK, May 24 2011, Reuters.
Jonathan Stempel, JPMorgan settles overdraft fee case for $110 million, February 07 2012, Reuters.
Kelkar and Shah, 2019, In Service Of The Republic: The Art And Science of Economic Policy, Penguin Random House India Private Limited.
Lahav, 2003, Fundamental Principles for Class Action Governance, Ind. L. Rev., 37, p 65.
Costs in Civil Litigation - Report No 240, May 2012, Law Commission of India.
Ram Coomar Coondoo v. Chunder Canto Mookerjee, June 30 1876, Privy Council.
Shreeja Sen and Deepti Bhaskaran, SC stays Allahabad HC order on scrutinizing SBI Life policies, July 15 2014, LiveMint.
Karan Gulati is a consultant at NIPFP and Renuka Sane is researcher at NIPFP. We thank Sudipto Banerjee, Aditi Dimri, Pratik Dutta and Ajay Shah for useful comments.
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