This article is written by Amritambu Satyarthi, pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from Lawsikho.com.
In most simplistic terms, consumer financial services are the services such as current and savings accounts, online payment services, credit cards, debit cards, mortgage lending, commercial lending, securitizations etc. that are provided to ordinary consumers. Companies and Institutions providing these services need to constantly adhere to the compliances enforced by regulatory agencies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Ministry of Finance etc.
With the economic growth, the demand for financial services has grown tremendously amongst the consumers. This has also led to an exponential rise in laws protecting consumers that are availing of financial services from financial institutions and companies. As a result of these laws and regulations, financial service providers face an onslaught of litigation. Consumers of financial services can be the customers of banking, capital markets, insurance etc. Litigations usually arise when these consumers are dissatisfied with the services being provided to them.
In this article, we will get an understanding of what entails consumer financial service litigations, new avenues that are leading to rise in such litigations and the way forward for such litigations in India.
What entails consumer financial service litigation?
Banks and financial institutions providing financial services to the consumers have to deal with a variety of claims involving:
- Enforcement of arbitration provisions of consumer credit card contracts.
- Challenges to the fees, interest rates and other contractual terms between a customer and the bank or financial institution.
- Reverse redlining and credit discrimination.
- Data privacy of customers along with other cybersecurity issues.
- Insurance coverage.
- Lien validity.
- Loan modification and forbearance contracts.
- Fraudulent debt management or fraudulent management of funds of the customer.
- Court proceedings initiated under various laws such as Consumer Protection Act, 2019, Banking Ombudsman Scheme, 2006, Insurance Regulatory Development Authority Act, 1999, SEBI Act, 1992, Pension Fund Regulatory and Development Authority Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act), SARFAESI Act, 2002, Insolvency and Bankruptcy Code, 2016, RBI Notifications, Regulations and Circulars etc.
- Unlawful or biased arbitration in consumer disputes.
- Financial service providers using unlawful means to obtain possession of consumer’s assets.
- Regulatory organizations filing compliance litigations against the financial service providers.
These are some of the claims on which consumer financial service litigations are based. The vast majority of disputes are the litigations instituted by consumers against financial service providers. But consumer financial service litigations can also entail regulatory bodies instituting suits against the financial service providers or the service providers themselves instituting litigations against consumers or regulators.
When the financial service provider or the Ombudsman or the regulator (RBI, IRDA, SEBI etc.) are not able to resolve consumer’s complaints, Consumer Disputes Redressal Commission (on National, State or District level depending upon the amount claimed by the consumer) or Courts’ intervention is usually sought by the consumer.
Functioning of Consumer Commissions
The relief provided to the consumers depends on the forum that they approach. Consumer Dispute Redressal Commissions while granting any order will have to pass that order within the confines of the Consumer Protection Act, 2019 (CPA). These can grant an order to:
- Remove any defects from the financial services that are being provided to the consumers.
- Return the price of the services along with interest to the consumer.
- Award compensation or punitive damages to a party to the dispute
- Withdraw the challenged financial services from the market.
CPA provided for three levels of grievance redressal bodies for resolution of consumer disputes;
- District Consumer Dispute Redressal Commission (DCDRC)
- State Consumer Dispute Redressal Commission (SCDRC)
- National Consumer Dispute Redressal Commission (NCDRC)
Section 34(1) of CPA provides that if the value of services or monetary claim of the consumer does not exceed Rs. 10,000,000 (1 crore) then the District Commission will have jurisdiction to hear the matter. As per Section 47(1)(a)(i) of CPA, if the claim of the complainant is between Rs. 1 crore to 10 crores, the complainant can directly approach the State Commission. For monetary claims exceeding Rs. 10,00,00,000/-, the matter can be filed directly with the National Commission, as per Section 58(1)(a)(i) of CPA.
Moreover, the State Commission has the power to entertain appeals against the decisions of the District Commission (Section 41), while the National Commission has the jurisdiction to hear appeals against the decisions of both State and District Commissions (Section 51). A party aggrieved with an order of NCDRC may approach the Supreme Court for relief in certain circumstances (Section 67).
Defining ‘consumers’ in financial services disputes
CPA does not consider a person who avails financial services for commercial purposes to be a consumer. Section 2(7)(ii) of CPA provides that a consumer means any person who “hires or avails any service for a consideration but does not include a person who avails of such service for commercial purpose.”
This restriction is not limited to the courts. Even insurance and banking regulators provide that a complainant (or consumers) must be acting in his or her personal capacity while availing of the financial services.
In Insurance Ombudsman vs. Indus Motor Co. P. Ltd. & Ors. (2005), the issue of determining whether an incorporated company availing insurance policy can be considered as a consumer came before the High Court of Kerala. The Court accepted appellants’ contention that a consumer is an ‘individual’ taking financial services on “personal lines” or “individual capacity.” Thus, the Court decided that an incorporated company taking financial services on products for commercial use would not be considered a consumer.
In the matter of HDFC Bank Ltd. vs. Subodh Ghanshyam Prabhu (2014), the respondent had purchased shares of various well-known companies and opened a share mortgage account with the petitioner bank. Respondent had taken a loan from the petitioner against these shares. Thus, NCDRC had to determine if the respondent in this matter comes within the ambit of “consumer” under the Consumer Protection Act, 1986. National Commission held that since the loan was not availed by the respondent for personal purposes, he would not be a consumer under Consumer Protection Act, 1986. Therefore, an investor taking a loan for commercial purposes would be barred from filing a consumer complaint.
Seeking remedy from the courts
A remedy under Consumer Protection Act, 2019 (CPA) cannot be sought from District Courts and High Courts of various states, as CPA expressly bars their jurisdiction. In Nivedita Sharma vs. Cellular Association of India and Others (2011), the issue came before the Supreme Court as to whether High Courts can entertain appeals against an order of State Consumer Commission. The Apex Court held that while Article 226 of the Constitution gives unabridged powers to the High Court to issue writs, yet the High Court should not entertain a writ petition against any order if an alternative remedy is available to the aggrieved party and the statute under which the High Court has been approached, itself consists of an alternate mechanism for redressal of grievances (like Consumer Commissions).
Nonetheless, High Courts can be approached in consumer financial services disputes under various statutes other than the CPA. Consumers can initiate litigations against the financial service providers in the commercial branch of the High Courts. High Courts in such litigations are bound by the legislation under which they are approached or the Constitution when granting relief to any party.
For many consumer finance disputes, the High Courts may be approached directly under Article 226 of the Constitution for enforcement of a legal right. Otherwise, the High Courts can initiate suo-moto proceedings on its own motion.
The Supreme Court may be approached when a financial services’ consumer’s fundamental right has been violated (Article 32 of the Constitution). An appeal to the Supreme Court may also lie against a decision of NCDRC only when the National Commission is exercising its original jurisdiction. When the matter has been decided by NCDRC after an appeal from the State Commission, no appeal to the Supreme Court lies from that decision. However, there is no bar on the Supreme Court’s extraordinary jurisdiction under Article 136 of the Constitution (Special Leave Petition).
Banking and insurance disputes
Generally, courts have favoured the consumers in banking disputes and have granted them relief. Yet in insurance disputes, the courts have a tendency to enforce the contractual terms even when consumers have demonstrated that the terms were opaque and unclear to the consumer.
In Banking disputes where the banks have acted against the guidelines, circulars or notifications of RBI the decision has been in favour of consumers. In Vaidyanath Urban Co-op Bank Ltd. vs. Narayan (2015), the respondent had made cumulative deposits with a bank that was merged with the petitioner bank. However, on the maturity of the deposits, the petitioner bank refused to pay interest to the respondent on these deposits due to the deposited amount not being renewed within the stipulated time that was mandated by RBI. The National Commission opined that the banks must inform the depositors of any policy decision that may deny or restrict the interest that is to be provided to the depositors. Thus, it was adjudged that when the bank only returned the principal amount to the depositor without any interest, then the consumer (depositor) would be entitled to interest and compensation from the bank.
In another judgement of State Bank of Mysore vs. TL Vasudeva Rao (1994), where instant credit was not provided to the consumer for outstation cheque, which led it to be dishonoured, the bank was held liable to pay compensation to the consumer.
In certain matters, the National Commission has even laid down the procedure when there is an absence of clear guidelines regarding an issue. In Atul Nanda vs. Reserve Bank of India (2008), a consumer of financial services approached the National Commission as RBI’s policy, with regard to the period for giving credit to the consumers, was unclear. Especially for outstation cheques, RBI’s policy was not known to the consumers. The commission accordingly issued directions for the benefit of the consumers that:
- Local cheques should be credited and debited on the same day or not later than the next day.
- The period for collection of the outstation cheque should not be more than 14 days.
- The detailed policy should be made available to the consumer if he or she requires.
In various other judgments Courts’ have generally shown a tendency to favour individual consumers while granting any relief. In Vijaya Bank vs. Gurnam Singh (2010), the bank allowed withdrawal of Rs. 3,50,000 against a cheque leaf which was reported as lost. The Supreme Court held the bank liable for wrongful withdrawal and directed it to reimburse this money along with costs to the consumer.
However, there have been matters where courts have ruled adversely against the consumers especially when there has been a delay in filing on part of the consumers. In MI Plywood Industries vs. Canara Bank (2012), the bank failed to provide the petitioner with mortgaged property’s original documents and NOC against a loan. The State and the National Commission dismissed the matter due to a delay on part of the petitioner’s lawyer.
In insurance disputes, Indian courts have predominantly tried to maintain the sanctity of contracts. In a very early judgement from the nineteen sixties, General Assurance Society Ltd. vs. Chandumull Jain (1966), an issue came up before the Supreme Court where some of the houses of respondent were insured against the river flooding which was prevalent in the area where these houses were situated. Until the policy was provided to the respondent, protection cover notes having a validity of thirty days were sent to the respondent. After the expiration of thirty days insurance policy was still not supplied to the respondent, who sought an extension of the protection cover note beyond these thirty days. The river flooding and landslides had already begun by this time, so the insurance company sought cancellation of the policy. Constitutional Bench of Supreme Court remarked that:
“In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties because it is not for the court to make a new contract if the parties themselves have not made it.”
The court ruled that insurance is a commercial transaction where sending a cover note before the completion of a proper proposal or while preparation of policy for delivery to the consumer, is a common practice. The Apex Court opined that an insurance contract is like any other contract where the insurer accepts the proposal of the consumer by accepting and retaining the premium paid by the consumer. The court ruled in favour of the insurance company since it did not accept the premium paid by the consumer and instead sent a letter to him to grant him a refund of this premium.
In the 2004 judgement of United India Insurance Co. vs. Harchand Rai Chandan Lal (2004), the respondent was insured against any damage or loss due to burglary. The insurance contract stipulated that burglary must be preceded by violence or threat. When theft occurred in the respondent’s premises without any violence then no relief was given by the court to the respondent. The Supreme Court clarified that when it comes to insurance contracts it will interpret and read the terms strictly.
Moreover, in a recent matter of M/s Industrial Promotion and Investment Corporation of Orissa Ltd. vs. New India Assurance Co., the Supreme Court was again tasked with interpreting the burglary and housebreaking insurance policy which required loss/damage to the property or theft on the property to be preceded by violence or threat of violence. Since theft occurred on the property in possession of the appellant without any violence, the court ruled that the appellant cannot take advantage of an insurance policy. The apex court again took the stance that terms of both insurance contract and any other contract shall be interpreted strictly, without any addition or subtraction from the terms of such a contract. The Supreme Court’s view was that it cannot through its interpretative process create a new contract between the parties.
The courts have enforced the contractual terms of insurance contracts even if they were unfair or one-sided, provided that the consumer knew about them. Courts have judged that full disclosure of material facts, terms and conditions of the insurance contract is essential. In Modern Insulators Ltd. vs. Oriental Insurance Co., when the insurance company only provided the cover note and insurance policy schedule to the consumer without disclosing key terms and conditions, the Supreme Court decided that the insurance company cannot take advantage of the excluded clauses that it did not disclose to the consumer.
When the consumers demonstrate to the courts or consumer commissions that they did not have knowledge of the terms and clauses of the contract then they can get relief from the forums.
Yet, the principle of holding the consumer to be strictly bound by contractual enforcement if he or she signs it has been enunciated in the judgement of Gautam Construction and Fisheries Ltd. vs. National Bank of Agriculture and Rural Development (2000). In this matter, the Supreme Court had to resolve the dispute arising between the parties out of a sale-purchase agreement for some office premises. The appellant was awarded interest at the rate of 18% per annum while the contract between the appellant and respondent stipulated an interest rate of 12% per annum. Therefore, the Supreme Court, while applying a strict interpretation of the contract, ordered the appellant to reimburse the excess amount it had received back to the respondent.
Courts assume that the consumers very well understand the terms that they sign. This may not always be true. Sellers of financial services may try to push financial products regardless of the fact that they may be unsuitable for that particular consumer.
The new Consumer Protection Act, 2019 provides powers to consumer commissions to declare certain unfair terms in financial services contracts as void. But the unfair terms are limited to disproportionate penalties on consumers, unreasonable charges, unilateral termination of the contract, refusal to accept early payment of debt and excessive deposits for the performance of the contract.
The Act does not make it easier for consumers to understand or better negotiate the terms of contracts for financial services and products. The government in this context should frame sector-specific rules to obligate the financial service providers to disclose material information to the consumer so that the terms are more understandable to them. The rules may also allow the consumers to negotiate some key terms of the contract and impose on financial service providers reasonable standards of fair dealing.
Various US legislations such as the Truth in Lending Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Fair and Accurate Credit Transactions Act, Home Mortgage Disclosure Act and Statutes on the prohibition of unfair and deceptive trade practices can be some good examples for Indian legislators to follow.
Challenges faced by parties in consumer financial service litigations
Financial service providers as well as consumers have to deal with various challenges when instituting consumer financial litigations in courts.
Excessive delay in resolution of financial service disputes
CPA mandates that efforts should be made to resolve disputes within three months. If testing and analysis are to be done, then a decision on any consumer dispute shall not take more than five months. Yet, the average amount of time taken for a decision in Banking disputes at NCDRC is 1.99 years. When it comes to insurance disputes the average amount of time taken is 2.38 years.
That is the situation when most of the disputes come before NCDRC as appeals from State or District Commissions. Since a decision has already been taken by the State or District Commission, therefore, the NCDRC has to ponder upon very few questions in a matter. Time is taken for settlements of disputes at the State or District commission level add to the woes of the parties. The average time taken for the resolution of a civil matter in ordinary courts is 3.49 years.
Additionally, there have been instances where financial service providers have tried to delay the judicial proceedings when it is to their advantage. Banks may use delaying tactics such as the need for translations, loss of documents etc. in finance and credit disputes as it will help them use the deposits of consumers.
Low amount of compensation being awarded
Low compensation being awarded to a complainant is another issue that discourages him or her from initiating consumer financial service litigations. In the matter of State Bank of Patiala vs. Rajender Lal, a cheque was dishonoured as it was lost in transit on its way back to the issuer. NCDRC held the bank liable to pay the customer or issuer a compensation of Rs. 15,000, even though the cheque was amounting to Rs.75,000. The issuer of the cheque could have been liable to pay twice of this amount and could have been imprisoned for two years for the dishonour of the cheque under Section 138 of the Negotiable Instruments Act, 1881.
Lack of class action lawsuits
Since Indian substantive law on class action lawsuits is not very clear like in other countries such as the United States and Canada, consumers of financial services in India are at a disadvantage. Class action lawsuits can help the consumers to pool resources, knowledge and litigation expenses when they are challenging service providers on similar issues.
When claims of a consumer are for a small amount, they may be unable to challenge a service provider. Class action lawsuits allow various consumers to aggregate their claims. When individual consumers do not have much bargaining powers over the financial service providers they can share evidence, witnesses and litigation expenses with other consumers who have claims against the same service provider.
The burden of proving who will be members of a class to institute a suit rests upon the plaintiffs. Members of a class are easier to determine in financial disputes, through tracing the contract by which the relationship between consumers/complainants and service providers arose. Yet the courts need to certify and recognize this class, for class-action lawsuits to be initiated. For this Indian courts also need to have a friendly approach towards class action lawsuits.
The new Consumer Protection Act, 2019 has further invalidated class action lawsuits with the creation of the Central Consumer Protection Agency (CCPA). The new Act mandates that any complaint regarding a violation of the rights of consumers as a class is to be forwarded to CCPA. Thus, the Act has effectively taken away the power of consumers to approach consumer commissions as a class, and instead directed them to put their complaints to the subjective satisfaction of CCPA.
Third-party funding (TPF) is also helpful in class action lawsuits. However, there is no central law to recognise TPF contracts as fair and just. It is entirely dependent on the court’s discretion, so there is a lot of uncertainty over third party funding of litigations. This has not allowed TPF to grow in India.
Laws expressly recognising class-action lawsuits could be helpful. Legislations also need to provide clarity on what constitutes an adequate portion of the class for it to approach courts.
Lack of specialization in dispute resolution forums
Consumer courts do have a very wide range of experience. However, in many consumer financial service litigations, the members and judges of such forums need to be aware of the complicated intricacies of finance. They need to have specialised knowledge of financial markets in order to resolve these disputes. In many other advanced common law jurisdictions, sectoral experts in finance adjudicate financial services and products disputes.
New avenues of consumer financial service litigations
The global economic crisis of 2008, brought to notice the wide-scale irregularities in the financial services market. As consumer rights abuses were rampant in this sector, a range of legislation were enacted by various countries, so that in future such a crisis could be averted. India followed suit and created the Financial Sector Legislative Reforms Commission, to harmonize and rewrite financial services laws. Nonetheless, most of their suggestions were not implemented, except for the creation of a Resolution Corporation (through IBC) that would identify entities facing insolvency and provide them with early resolution.
Development of the fintech sector, enactment of Insolvency and Bankruptcy Code, 2016, increased focus on data privacy and data protection of the consumers, the rise of internet banking etc. are the factors that are necessitating the government and Indian legal system to innovate. Additionally, the current government has increasingly focussed on the financial inclusion of people from all strata of the society through schemes such as Jan Dhan Yojana, Pradhan Mantri Mudra Yojana, Pradhan Mantri Suraksha Bima Yojana, Stand Up India Scheme etc. The financial service market is destined to expand even further to great lengths.
Naturally, it could lead to more instances of friction between consumers and financial service providers. In November 2020, RBI announced the creation of an Innovation Hub, for the purpose of creating an ecosystem for easier access to financial services and financial inclusion.
Association of Mutual Funds is targeting a three-times growth in investor accounts to 130 million by 2025. Additionally, the investment corpus in the insurance sector of India is expected to rise to $1 Trillion by 2025. In April 2021 transactions through immediate payment service (IMPS) increased to 322.96 million amounting to the US $40.85 billion by value. Similarly, in the same month, United Payment Interface (UPI) recorded 2.73 billion transactions amounting to US$ 67.31 billion.
All these stats indicate that the Indian financial market is diversifying at a rapid pace. Banking services only may not be the predominant financial service in the future. Keeping all these factors in mind, the financial service market will grow exponentially in the coming years. Reflecting this trend consumer grievances, complaints and litigations are also bound to increase many folds.
Since the consumer financial service litigations are bound to rise in the coming years, India needs to develop an efficient and fast grievance redressal mechanism and judicial system. While judicial reforms would be a continuous process requiring years, there are certain steps that could be taken with immediate effect to improve financial dispute resolution procedures.
One of the steps that could be taken is promoting arbitrations in consumer financial disputes. Arbitrations can ensure speedier resolution of financial disputes. Additionally, arbitration proceedings are much more flexible than court proceedings, and therefore gives much more room to the parties to negotiate and resolve their disputes when compared to conventional court proceedings. This position was supported by the Supreme Court in M/s Afcons Infra Ltd. vs. M/s Cherian Varkey Construction Company Ltd. (2010). In this judgement, it was held that consumer financial disputes could be referred to not only mediation but arbitration as well.
But this decision was overturned in A Ayyasamy vs. A Paramasivam (2016), where the apex court adjudged consumer disputes not to be arbitral due to their public nature. Public disputes determine the rights of parties against the public at large. The court opined that since in consumer disputes the parties are not only determining their rights amongst themselves but the public at large, therefore they are non-arbitral. The court further held in this judgement that specific categories of disputes whose jurisdiction have been granted to a special forum cannot be referred to arbitration. Jurisdiction of consumer disputes has specifically been granted to consumer forums (or commissions) under Consumer Protection Act, 2019, which bars them from arbitration. This stance was further supported in the judgement of M/s Emaar MGF Land Ltd. vs. Aftab Singh (2018).
The legislature must step up, to declare consumer financial disputes to be arbitral. Low compensation awarded to the parties is another issue that encourages parties to renege from their financial services contracts. For example, financial service providers who are aware of this fact may purposefully act in a way detrimental to consumer’s rights, as the cost to the service provider for such a breach may be minimal.
If we add delaying tactics of the service provider to the equation then consumers will face even more woes. Courts in India are still awarding compensation and relief to the consumers in consonance with the old Consumer Protection Act, 1986. A law that is 35 years old does not reflect the present market condition. Therefore, the Legislature needs to issue new rules under the Consumer Protection Act, 2019, to clarify the process of awarding compensation to parties. In many other jurisdictions courts award disgorgement (surrender of profit gained through illegal means) and remedy of restitution to the injured party. Through this process, actual damage could be measured based on the defendant’s wrongful gains and by calculating the plaintiff’s loss based on their capital cost.
Efforts should be made to promote class action lawsuits. Legislations or rules providing for adequacy requirements of a class and issuing rules providing for contingency fees for lawyers could be important steps in this direction. The contingency fee is the fee that a lawyer, representing a certain class of litigants, would get which would be a proportion of the costs that are awarded to the litigants.
The legislature can take further steps such as enacting sector-specific rules for consumer financial disputes under Consumer Protection Act, 2019 (like it has enacted for E-commerce). The legislation also needs to be enacted for mandating the financial service providers to disclose and explain all the terms and information to the consumers regarding a financial product or service. There have been many instances when disputes have arisen on account of consumers not understanding the terms of a contract despite having full knowledge of them.
Finally, judicial delay, an issue that has been haunting India for decades, needs to be addressed. For this, the essential reforms would need to be taken with regard to the functioning of consumer commissions. The creation of a National Judicial Centre for handling administrative tasks of consumer courts, separating them from judicial functions, can be an important measure. As members of the consumer commission will have more time for hearing matters, this could reduce the delay in the resolution of consumer disputes. The National Commission (NCDRC) can exercise its powers to conduct statistical analysis and regularly review the functioning of State and District Commissions, in order to find out the causes which are leading to a backlog of matters. On the basis of this, Consumer Commissions can prioritise resolving older disputes before the new ones.
Despite the COVID-19 pandemic, the Indian economy and the financial sector is bracing for exponential growth in the coming years. The market of financial services is ever-expanding and is now making inroads into rural India. Financial Service Litigations will only grow with time. Legislative and judicial reforms to deal with this situation are the need of the hour. Besides this, there is an urgent need for a robust mechanism for the enforcement of contracts. The reforms suggested in this article would not only improve the redressal mechanism of consumer financial service disputes but would also positively affect the entire judicial system.
Rules and norms requiring the financial service providers to disclose and explain all the terms to the consumers need to be notified. Efforts to provide financial literacy and education to the masses would go a long way.
- Roman Inderst and Marco Ottaviani, “Misselling through agents” (2009) 99(3) American Economic Review 883.
- National Judicial Data Grid, “Summary Report of India as on July 13th 2020” https://njdg.ecourts. gov.in/njdgnew/index.php
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