India has undergone a remarkable financial transformation in the past two decades. Millions of households have entered the formal financial system through digital payments, expanded banking access, mutual fund investments, insurance products, pension schemes, and direct participation in capital markets.
Yet the success of financialisation has exposed a less celebrated reality: a corresponding increase in consumer vulnerability. Complaints ranging from product mis-selling and opaque disclosures to excessive compliance burdens, aggressive recovery practices and deficient grievance redressal mechanisms have proliferated across the financial sector.
Effective consumer protection cannot be treated merely as a subsidiary objective within a broader regulatory framework. It requires dedicated institutional focus, specialised expertise and clear accountability.
Difficulty of the current set-up
All major financial regulators in India—the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA)—recognise consumer protection as an important regulatory objective. Yet, in practice, it remains subordinate to their primary mandates of financial stability, prudential supervision and market development. Ombudsman and grievance-redressal arrangements exist, but they are frequently perceived as slow, fragmented and lacking sufficient authority to provide effective remedies.
This is further complicated by many issues that fall into the cracks of India’s fragmented regulatory architecture. For example, a customer who has been mis-sold an insurance product through a bank branch may find the issue touching the jurisdictions of multiple regulators. Similar complexities arise in the distribution of mutual funds, pension products and hybrid financial instruments. Too often, consumers find themselves negotiating directly with the very institutions against whom they seek redress.
This predicament is hardly unique to India. The global financial crisis of 2008 brought these concerns into sharp focus, exposing how inadequate consumer safeguards could amplify systemic vulnerabilities and undermine trust in financial markets. Broadly speaking, advanced economies have adopted two approaches to address this challenge.
The first model is that of a dedicated regulator charged exclusively with protecting consumers of financial products and services. The most prominent of these is the Consumer Financial Protection Bureau (CFPB) in the US, set up in the aftermath of the global financial crisis.
The rationale for creating the CFPB was straightforward yet compelling. Policymakers recognised that in a regulatory system characterised by multiple sectoral regulators, consumer protection had effectively become an “orphaned” responsibility. Fragmented oversight created regulatory blind spots, enabled arbitrage opportunities and often relegated consumer interests behind prudential concerns.
By consolidating responsibility for consumer protection within a single institution endowed with rule-making, supervisory and enforcement powers, the CFPB sought to ensure that consumer welfare received the sustained attention it deserved.
Second, the Twin Peaks model separates financial regulation into two distinct pillars: prudential supervision and conduct regulation, and has gained prominence across several advanced jurisdictions, including the UK, Australia, the Netherlands and Japan. The UK offers perhaps the most developed example of this framework.
Prudential supervision is undertaken by the Prudential Regulation Authority (PRA), whose primary focus is the safety and soundness of financial institutions. Conduct supervision, meanwhile, is entrusted to the Financial Conduct Authority (FCA), which oversees market behaviour, consumer protection and business conduct. The intellectual foundation of the Twin Peaks approach is that prudential and conduct objectives are fundamentally different and can sometimes conflict.
A regulator focused primarily on systemic stability may naturally prioritise institutional resilience over consumer outcomes. Conduct supervision, by contrast, requires an unwavering focus on how financial institutions interact with customers, market participants and society at large. Separating these functions ensures that consumer protection does not become subordinate to broader prudential concerns.
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Lessons for India
The question for India is therefore not whether stronger consumer-protection mechanisms are required, but rather what institutional form they should take. At first glance, the American approach of creating a dedicated consumer-protection agency may appear attractive. Yet such a solution would leave intact the broader fragmentation of supervisory responsibilities.
Compliance requirements could become more burdensome, supervisory mandates more complex and regulatory coordination more challenging. Rather than simplifying the architecture, an additional regulator could further clutter an already crowded landscape.
A more ambitious—and ultimately more coherent—solution would be to adopt a genuine Twin Peaks framework for India.
Under such a model, prudential supervision would remain focused on preserving financial stability and institutional soundness. A separate integrated Conduct Authority would assume responsibility for supervising market behaviour, distribution practices, disclosure standards, customer treatment and consumer protection across the entire financial sector.
The conduct regulator would oversee banks, insurers, securities intermediaries, pension providers and other financial entities through a unified lens, irrespective of sectoral boundaries. The advantages of such an arrangement are substantial.
First, it would eliminate regulatory blind spots that arise when products and distribution channels cut across institutional jurisdictions. Consumer issues involving multiple financial products could be examined holistically rather than through the narrow prism of individual regulators.
Second, it would significantly reduce opportunities for regulatory arbitrage. Financial firms would be unable to exploit differences in supervisory approaches across sectors, promoting greater consistency in consumer standards. Third, a unified conduct regulator would be better equipped to identify emerging patterns of misconduct and intervene proactively before they become systemic problems.
Modern financial markets are increasingly interconnected; supervision that remains siloed by sector is becoming progressively less effective. Fourth, and perhaps most importantly, it would send a powerful signal that consumer welfare is not an ancillary consideration but a central pillar of financial regulation. Trust is the indispensable foundation of any financial system. As more households entrust their savings, retirement funds and insurance protection to regulated institutions, preserving that trust becomes a matter of national economic importance.
India’s financial system stands at an inflexion point. The extraordinary expansion of financial inclusion and market participation has created immense opportunities for economic growth and household prosperity. But financial deepening cannot be sustained indefinitely unless accompanied by equally robust mechanisms for protecting consumers.
The lesson from international experience is clear. Effective consumer protection cannot be treated merely as a subsidiary objective within a broader regulatory framework. It requires dedicated institutional focus, specialised expertise and clear accountability.
Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering.
Harsh Vardhan is a management consultant and researcher based in Mumbai.
Views are personal.
(Edited by Saptak Datta)
Interesting article! There’s a reason the political elite will not take this further… There is a deep, nefarious link between the biggest industrial houses and the central government- be it bribery or election funding or off shore source to boost stock prices.
Strengthening the financial system is not in their interest.