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Financial Innovation and Consumer Protection

As published in FINNOVA ’14  by the Post Graduate Department of Commerce and Management, ISBN 978-81-89085-91-9, November 2014

A STUDY ON FINANCIAL INNOVATIONS AND CONSUMER PROTECTION

– with special reference to the Role of Financial Consumer Protection Agencies in India

Abstract:

The Indian financial services sector has undergone metamorphic changes in the recent past. The financial sectors in India is ever expanding and dynamic in nature. It comprises of banking and non-banking financial companies, Insurance companies, cooperatives, pensions funds, mutual funds and other smaller financial entities.i The growing competition, coupled with globalisation, deregulation and marketisation have thrust innovations in processes, products, practices and service standards. Innovation means introducing something new that could replace the old ways. The traditional product portfolios of financial institutions are being replaced with more complex products, which have given birth to a new discipline known as financial engineering.

Financial engineering very often creates complex products out of inherently simple products. This is found very common world over especially in the structured financial derivatives, where the payoff profile and risks inherent in the structure are significantly different from those of its underlying constituents. When such product design is combined with aggressive sales practices led by perverse compensation systems, it leads to mis-selling to vulnerable consumers. The end result is of consumer disputes, resulting in loss of reputation for the financial service providers.

The protection of investors and financial consumers ensures that the consumers receive information to make informed decisions. This facilitates the need for Financial Literacy which gives the knowledge, skill and confidence to understand and receive information to evaluate the risk and reward that is inherent in the innovative financial product. The major challenges of financial innovations in India in the post financial crises are matching financial products with the risk takers; regulators keeping track with what is happening in the market; Innovation and product structuring coupled with supervisions; Customer orientation and delivery and Consumer level of literacy.

Today’s Indian financial system is characterized by existence of various financial innovations in the field of corporate finance, bank finance and investment finance. India is also undertaking a fundamental review of its financial sector legislation, with the creation of the Financial Sector Legislative Reforms Commission (FSLRC), whose mandate is to rewrite and harmonise the sector lawsii and multiple regulatory authorities and consumer protection agencies.

Through this paper, the author puts a sincere effort in exploring the concept of financial engineering, and its effect on the financial products. An attempt is also made to discuss the issues relating to financial illiteracy and financial consumer protection in the backdrop of the enactment of the Indian Financial Code.

Keywords: Financial Engineering, Financial Product Innovation, Indian Financial Code, Financial Consumer Protection.

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