Grievance Redress by Courts in Consumer Finance Disputes

by Karan Gulati and Renuka Sane.

India has made progress on financial inclusion through the use of digital payments and fintech. As more and more consumers interact with the consumer finance industry, there will invariably be greater frictions and an increasing number of grievances. In an environment with a good consumer complaints system, these should get resolved by the financial service provider (FSP), and if not the FSP, then the regulator. However, this is not so in India. Courts are often the preferred recourse for retail consumers. For example, in the ongoing dispute regarding Yes Bank's written off AT-1 bonds, consumer courts seem like the last remaining alternative for retail investors. Unless grievances are satisfactorily resolved, we may hurt the progress made on financial inclusion. While India needs to set up good regulator-based grievance redress mechanisms such as a Financial Redress Agency, it also needs to improve the functioning of courts to provide effective relief in consumer finance (and other)disputes. In a recent paper, Grievance Redress by Courts in Consumer Finance Disputes, we review 60 judgments on consumer finance to study the position that courts have taken on these disputes. We also describe the challenges in court functioning that have a bearing on the efficiency of courts in dealing with issues of grievance redress.

The structure of courts

In 2020, India enacted a new Consumer Protection Act (CPA). The Act aims to protect consumers' interests and provide timely and effective settlement of disputes. It entrusts courts to redress consumer grievances. A complainant can approach specialised courts i.e. consumer commissions established by the CPA. However, these are additional remedies. Cases may also be decided by the High Court of various States and the Supreme Court of India.

The powers to grant relief depend on which court the complainant approaches. Consumer commissions are bound by the CPA. They may order a party to: (i) remove defects, (ii) return the price of the goods or the charges for the services along with interest, (iii) pay compensation or punitive damages, and (iv) withdraw the goods or services from the market. High Courts are bound to decide cases either within the confines of a statute under which they are approached or the constitution. Going one step further, the Supreme Court has held itself not restricted in any way to grant adequate relief.

Banking and insurance disputes

Litigation is disproportionately costly and troublesome for small consumers. Very rarely can an ordinary consumer go through the prolonged ordeal of fighting with a bank. For this reason, courts have granted relief to individual consumers, given that they come with clean hands.

This has not been the case when interpreting insurance contracts. If consumers knew about the terms, courts have enforced the terms of the contract, regardless of whether the terms themselves were unfair, one-sided, or opaque. On the other hand, if the terms were kept hidden from the consumer, courts have granted relief to consumers. This is true both while entering the contract and settling claims.

Several consumers have been introduced to complex products and contracts, but these consumers have insufficient know-how. They are vulnerable to mis-selling. The strategy in Indian finance has historically focused on the caveat emptor doctrine -- let the buyer beware. Though the new CPA gives consumer commissions the power to declare certain unfair terms as void, it does not address the ability to understand the terms. Thus, consumers have been left to their own devices, and unaware consumers are unlikely to get their desired remedy if they approach a court.

Challenges to court functioning

We find the following challenges in court functioning as they deal with consumer finance disputes.

1. Low Compensation: Courts tend to award low compensation that does not adequately compensate the complainant. 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. Though the insurer was directed to repay the original Rs. 50,000, no interest was awarded. The reason for low compensation seems to be that there are no guidelines for courts to follow. There is no expert analysis of the loss. In the absence of financially prudent legislation, courts often tend to award compensation that only makes sense when the legislation is enacted.

2. Delay: Low compensation becomes more severe when it takes too long to settle disputes. The CPA provides that cases should be decided in no more than five months. However, as per the case management system of the National Commission, it takes 1.99 and 2.38 years to settle banking and insurance disputes, respectively, i.e. more than five times the statutory guideline. In fact, in February 2020, the National Commission adjourned a matter till January 2021 - almost a year after the hearing.

3. No Class Action: If consumers cannot understand complex financial agreements, they may benefit from pooling their knowledge and approaching courts as a class. Plaintiffs can share evidence, expert witnesses, and litigation costs. However, unlike other countries, such suits are few and far between in India. This may be because of unclear substantive law and strict rules on financing litigation. This makes it difficult for class members to come together. Courts have left it to their discretion to evaluate whether the class is adequately represented and whether financing agreements are fair. Moreover, the legislature had prohibited contingency fees. This creates a system that either prohibits or disincentives class actions.

4. Specialisation: Consumer courts in India resolve all consumer disputes. Though the members are highly qualified individuals, they lack specialization in finance. This is unlike other common law countries where sectoral experts adjudicate finance disputes. They have adopted extensive adjudicatory legislation regarding financial products and services. On the other hand, laws in India regarding finance have been restricted, leaving courts to start from a clean slate. If timeliness and predictability can make India's finance regime more appealing, specialization by adjudicators could prove valuable.

Way forward

One obvious way to improve the system is by general improvements in the judiciary's capacity and knowledge on matters related to finance. This will, however, take a long time. Policymakers should also consider adopting certain targeted interventions.

There are two types of interventions that are required. The first is on the legislative front. Like the targeted legislation in other countries, the legislature could enact separate rules for financial transactions mandating clear and understandable disclosures. Policymakers may also consider prescribing adequacy requirements in class action suits and transitioning towards contingency fees for lawyers and third-party investors. Any such changes in legislation would also benefit from an advisory council on consumer finance. The council may be responsible for making representations about policies; reviewing, monitoring, and reporting their effectiveness; and highlighting its views on new rules and regulations.

The second is on the judicial front. One problem we identify is low compensation. This may be addressed by updating and consolidating the rules governing compensation considering modern market understanding. Other jurisdictions often order disgorgement (surrender of profits earned through illegal means) or grant a remedy of restitution. This seeks to measure actual damages. On the question of delays, courts may also separate their judicial and administrative functions. This will likely reduce the time it takes to conclude hearings since members of the commission would have more time to focus on their judicial tasks. The National Commission can also exercise its power to call for statistics from State Commissions and conduct systematic reviews.

These solutions can have significant consequences, especially in India, where financial literacy is low and regulatory enforcement appears weak. Though they were developed after studying consumer finance disputes, they may have consequences outside this domain and yield better functioning courts. Market-oriented compensation, without delay, when parties can come together as a class would be beneficial in any dispute. In a growing financial landscape such as India, redress bodies such as the judiciary become increasingly important. A specialized consumer protection law is a step in the right direction, but it can benefit from targeted interventions.

References

Department of Economic Affairs, Report of the Financial Sector Legislative Reforms Commission: Volume 1, March 2013.

Dhirendra Swarup, Establishing the Financial Redress Agency, January 27 2017, The Leap Blog.

Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.

Karan Gulati and Renuka Sane, Why do we not see class-action suits in India? The case of consumer finance, May 03 2020, The Leap Blog.

Karan Gulati and Shubho Roy, India's low interest rate regime in litigation, March 11 2020, The Leap Blog.

Murali Krishnan, Supreme Court urges consumer forum to look into grievance of year-long adjournments, August 16 2020, Hindustan Times.

National Informatics Centre, Computerization and Computer Networking of Consumer Forum in the Country.

Neil Borate, Those mis-sold Yes Bank AT1 bonds face long haul, May 11 2020, LiveMint.

Pratik Datta, Mehtab Hans, Mayank Mishra, and others, How to Modernise the Working of Courts and Tribunals in India, March 25 2019, NIPFP Working Paper No 258.

Reserve Bank of India, National Strategy for Financial Inclusion, January 10 2020.

Supreme Court Bar Association v. Union of India, April 17 1998, Supreme Court of India.

Tinesh Bhasin, RBI sees 387% rise in complaints against NBFCs, 58% rise against banks, February 08 2021, LiveMint.

The authors are researchers at NIPFP.