OMBUDSMAN – AN EFFECTIVE ALTERNATE DISPUTE RESOLUTION MECHANISM FOR BANKING AND INSURANCE CONSUMERS

– Dr. G. Mallikarjun

ABSTRACT

Financial Consumer Protection is of paramount importance in ensuring increased participation in the financial sector. Significant segments of financial sector which trigger growth in the economy and provide capital for Government and also private enterprise are banking and insurance sectors. Banks deal with financial assets which are complex and the nuances of the various assets and the risks and returns as well as terms and conditions are difficult to comprehend for common person. Insurance is a promise to protect the insured against the loss due to an insured peril for the consideration of payment of premium to the insurer. The protection comes with the onerous responsibility of acting in utmost good faith along with elaborate and complex terms and conditions as listed in the policy document. The benefit of the banking and insurance services when denied without justification creates distrust dissatisfaction on the banking and insurance business. This could impact the savings and thereby investment climate having a ripple effect on the economy.

Approaching Courts for the myriad kinds of deficiencies of service by banking and insurance customers not only subject the customers to disproportionate cost and inconvenience but also impose a heavy load of litigation on the already burdened system of courts. The cost and consequent delay in resolution of such grievances would result in dissatisfaction and thereby adversely impact the government-driven initiatives for greater banking and insurance inclusion.

The Ombudsman system in banking (including digital banking) and insurance sectors provides an effective, inexpensive and expeditious system of resolution of grievances. While the institutions of Banking and Insurance Ombudsmen have been functional since 1995 and 1998 respectively, both have been fine-tuned through modifications from 2018. Both the Ombudsmen handle grievances and strive for amicable resolution of complaints of deficiency of service through agreement by conciliation and mediation or if this fails through issue of Award. The increasing expansion of these institutions and the growing number of complaints is reflective of the effectiveness as well as the trust in these institutions as effective alternate dispute resolution mechanisms for dispute resolution in banking and insurance sector.

INTRODUCTION

Financial sector is the most important segment of the economy having a significant impact on the enterprise, employment, growth and development of the country. The main function of financial sector is financial intermediation between savers and borrowers, investors and investees, risk-takers and risk-protectors etc. There are different classes of institutions engaged in financial intermediation which can be classified into banks and non-banking financial institutions which include insurance companies as well.

ROLE AND IMPORTANCE OF BANKS AND INSURANCE COMPANIES

The most important class of financial intermediaries is banks which are institutions which are engaged in the business of acceptance of deposits of money from members of public for the purpose of lending, repayable on demand or otherwise and withdrawable by cheque draft, order or otherwise. Banks are diverse based on their corporate status (companies, cooperatives, corporations), ownership (public sector, private or foreign), services offered (full range universal banks to small finance or payment banks), area of operation (local/regional, national, international), number of places of business (one office to international spread) etc.

Insurance companies are engaged in the business of protection against risk of loss due to insured perils for consideration of premium. Depending on the risk / peril covered insurance can be broadly categorized into life insurance, general insurance (health, fire, marine and miscellaneous insurance) and reinsurance.

In terms of contribution to economy at large and their importance, banks and insurance companies stand out. Banks pool the savings of individuals and institutions through various kinds of deposits and put them to use by lending for various purposes like agriculture, industry, small business, domestic and international trade, infrastructure, purchase of house and amenities, consumption etc. Banks also invest in various instruments like shares, securities, bonds etc. most important of which are government securities which Government securities issued for borrowing by State or Central Government. The policyholder funds are invested largely in Government securities and bonds and to some extent in debentures, shares, etc. These investments provides capital and funds for economic and developmental purposes. Thus, individuals, private and public enterprise as well as Government receive huge amount of funds from banks and insurance companies.

FINANCIAL AND INSURANCE INCLUSION – IMPORTANCE AND CONSTRAINTS

The Government and the regulatory initiatives have been targeted towards greater inclusion of members of public in banking and insurance to enable pooling of savings from a larger number of people thereby making available more money for economic activity.

The problem with financial products is that they are not real assets to be tested before they are acquired thereby satisfying about their satisfactory functioning. The principle of ‘buyer beware’ does not apply to the financial products like banking and insurance. The forms and formalities required for acquiring financial products and the elaborate terms and conditions as well as the legalese make them difficult to comprehend. The obligation on the customer is much more onerous in insurance as it is a contract of utmost good faith. Given the information asymmetry between the insurer and the policy holder, the obligations on the customer are too onerous.

Further since customer gets the service only when the peril strikes and loss is incurred, the time gap could be substantial. In case where the insured peril is death, the policyholder will not survive to see whether the service has been provided or not. However, frequency of interactions between insurer and policy holder are not many except in case of payment of insurance premium or renewal. This is not the case of banking, since the number of interactions and the range of services availed of are more making it important for the bank to ensure continued good standards of service during the entire period of association which may in most cases be for life.

The fact that there is immense competition in both banking and insurance provides enough range of institutions and products to choose from. However, while in insurance, a policyholder gets locked up in respect of a policy for the tenure, the annual or short term nature of the policies renders an opportunity for moving out of the relationship in case of general insurance as compared to life insurance. In case of banks, closing a savings or current account and moving to another bank has of late become difficult given the linkages of the account with various services like loan, credit card, bill payment, business relationship, cheques issued etc. and the difficulty in migrating all these to another account. In case of loans also the pre-closure of loans though permitted have a cost to it which makes it unviable for moving from one bank to another. The levels of satisfaction with services of bank or an insurance company are passed on through the word of mouth adding credence to the adage ‘a satisfied customer is the best advertisement’.

Any deficiency of service triggers grievances. While the touch points are many in case of banking relationship, it is but natural that there would be a plethora of grievances against banks of varying levels of seriousness, complexity and consequent loss. Hence, volume is an important aspect in grievance redressal in banks. In case of insurance, while the number of transactions of a single customer in respect of an insurance policy would only be a few per customer per policy, the importance of the transactions would be significant with the impact being a complete negation of the promise of benefit for the customer from the relationship. Therefore, value of the transaction and timeliness of fulfilling the promise are of utmost importance in insurance.

INTERNAL GRIEVANCE REDRESSAL SYSTEMS

The regulators (RBI and IRDAI) have issued instructions to banks and insurance companies to have in a place and publicize about a grievance redressal policy indicating channels for registering complaints, timelines of disposal of complaints, levels of escalation, Nodal Officer for coordinating with Ombudsman Offices etc. Based on the recommendations of Committee on Customer Service in Banks , every bank was advised to appoint a senior officer having experience in banking as an Internal Ombudsman as the final and independent level of escalation in the bank to resolve complaints unresolved by the internal grievance redressal machinery.

ALTERNATE DISPUTE RESOLUTION SYSTEMS

In case the grievances of banking and insurance customers are not resolved to their satisfaction, they will be forced to approach alternate fora or courts for resolution. While arbitration and conciliation clause is not a part of banking contracts, it is a clause in most of the general insurance contracts for businesses. Marine insurance policies, fire and special perils policies, industrial polices, etc. contain arbitration clause. However, this is applicable only in cases where liability is admitted by the company but there is a dispute only in the quantum of claim. Where insurance company does not admit liability, there cannot be arbitration. Further, arbitration involves cost and time for the proceedings to take place. Once the arbitration and conciliation does not yield result, the arbitrator would issue an Award. This is not final as this can also be appealed against before a Court.

In the absence of a provision for arbitration, the only option available to the dissatisfied customer would be to approach a Court. Being disputes in contract, the place where the dispute has to be filed is a Civil Court of jurisdiction based on the amount of compensation claimed. However, in case of banks and insurance companies in the public sector, since they come within the definition of ‘State’ under Article 12 of the Constitution of India, writ jurisdiction of High Court and Supreme Court can also be invoked.

The main problems for the customers in approaching courts are absence of awareness of the legal and procedural formalities to be complied with; cost of engaging Advocate to draft the affidavit / petition and to represent the customer in the proceedings before the Court and payment of court fee depending on the compensation claimed; time taken for the matter to be decided to the Court of original jurisdiction and for the disposal of appeals making the process very complicated, costly, time-consuming and laborious. From the justice delivery perspective also the numerous disputes of deficiency not redressed by the banks and insurance companies add to the heavy load of litigation when the Courts already have a huge backlog of cases pending for disposal.

The Consumer Protection Act, 1986 was enacted “to provide for better protection of the interests of consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consum¬ers’ disputes.” The District Forum, State Commission and National Commission set up under the Act have been inter alia empowered to arbitrate and mediate and if not resolved thus, to decide upon complaints of deficiency of service. Banking and insurance have been included under the definition of ‘service’ thereby enabling customers who allege deficiency of service by banks and insurance companies to be file complaint with the appropriate Consumer Dispute Redressal Forum based on territorial and pecuniary jurisdiction.

The cost of filing complaint is low, procedural requirements are simple and less legalistic thereby enabling customers to file complaints and pursue these by themselves without even engaging an Advocate. However, due to vacancies of members, increasing formalities, greater involvement of Advocates in handling matters and the increasing number of complaints have all resulted in enormous backlog and consequent delays in disposal of cases even in consumer courts.

The cost and consequent delay in resolution of such grievances would result in dissatisfaction of customers which in turn would dissuade other customers from joining banking and insurance, thereby adversely impacting the government-driven initiatives for greater banking and insurance inclusion.

OMBUDSMAN FOR GRIEVANCE REDRESSAL

It is in this context that Ombudsman Scheme has a significant role to play in redressal of grievances in an inexpensive and expeditious manner. The problems observed in formal system of Courts and even Consumer Fora led to the introduction of Ombudsman for banking first (in 1995) and insurance later (in 1998). Both the Ombudsmen handle grievances and strive for amicable resolution of complaints of deficiency of service through agreement by conciliation and mediation or if this fails through issue of Award.

OMBUDSMAN SCHEMES FOR BANKING AND INSURANCE

The key aspects of Schemes of Ombudsman for Banking and Insurance is tabulated

TABLE 1. Key aspects of Ombudsman Schemes in Banking and Insurance

WORKING OF BANKING OMBUDSMEN

The operational parameters of functioning of the Banking Ombudsmen based on data from the Annual Report of Banking Ombudsmen published by RBI for the years 2017-18, 2016-17 and 2015-16 are tabulated in Table 2.

TABLE 2 – Banking Ombudsman Complaints

Key points of functioning of Banking Ombudsmen based on the reports and the data are as follows:

• There are 21 offices of Ombudsmen operating across the country through which 1.6 lakh complaints were handled during 2017-18.

• The main types of complaints received by Ombudsman are relating to non-observance of fair practices code (22%), complaints relating to ATM, Credit or Debit cards (22%), failure to meet commitments (7 %) and complaints regarding mobile / internet banking (5%).

• Public sector banks account for 63% of complaints while Indian private sector banks and foreign banks account for 28% and 2 % of the total complaints respectively.

• The number of complaints received by the Ombudsman has been registering an increase of over 25 % in the past two years which is attributable to increased awareness about the scheme because of continuous efforts of the RBI and greater trust in the institution.

• The proportion of maintainable complaints to total complaints has been about 50% in all the years which can be improved by ensuring that general public are conscious of making complaint to bank before approaching RBI, banks against which complaints can be handled by BO, grounds of complaint, etc.

• The proportion of maintainable complaints disposed in customer’s favour either through settlement / withdrawal / award increased over the years with the proportion rising from 36 for the year 2015-16 to 43 % for the year 2016-17 and shooting up sharply in 2017-18 to 66 %.

• The fact that 96 % of the complaints are disposed and the complaints pending has been about 5-6% on an average over the three year period is indicative of the speed of disposal of complaints by BOs. The number of complaints pending for more than 3 months has been miniscule in comparison to the volume of complaints handled. The opening of new BO Offices and rationalization of jurisdiction of existing offices over the years by RBI has helped in better management of volumes by offices receiving large number of complaints like New Delhi, Mumbai, Kanpur, etc.

• The number of awards issued by BOs has increased sharply in 2017-18,

• The number of appeals has also increased substantially in 2017-18 in comparison to previous years because of the increase in the grounds for appeal in 2017 and also the increased number of awards issued by BOs. However, the appeals constitute 0.07% of the total complaints handled during the year indicating that the decisions of BO are honoured and final in 99.93 % cases, which is a pleasant departure from decisions of any Court or Consumer Forum where the appeals by either party are substantial. However, even after an appeal, if the customer is not satisfied with the disposal, he is free to approach other fora or Courts for resolution of grievances.

• While for the complainant, the access to BO is free, for RBI which is administering the scheme, the average cost of disposal of a complaint is just Rs. 3500, which has been showing a downward trend over the past three years. This indicates clearly that that the cost of resolution of grievances by BOs is cheaper than any Court or Consumer Forum.

Thus, BO system has ensured that the resolution of consumer complaints is inexpensive, faster and more efficient given that the instances where both parties are happy with the settlement, thereby indicating the success of the Banking Ombudsman Scheme as an effective and efficient alternate dispute resolution mechanism for most banking consumers.

WORKING OF INSURANCE OMBUDSMEN

The functioning of the Insurance Ombudsmen can be assessed based on the Annual Report of Insurance Ombudsmen published by Executive Council of Insurers. The reports for the years 2017-18, 2016-17 and 2015-16 have been perused and key operational details are tabulated in Table 3.

TABLE 3 – Insurance Ombudsman Complaint Data

Key points about the functioning of Insurance Ombudsmen based on the reports and the data tabulated is as follows:

• There are 17 offices of Insurance Ombudsmen operating across the country. However, only 8 Ombudsman are operating presently. There have been instances of long periods of vacancies in the offices of insurance ombudsman which can be attributable largely to the slack process of appointment of Ombudsmen which is wanting in planning and coordination of Directorate of Insurance, Ministry of Finance; IRDAI and ECOI. However, the position is barely managed by making an arrangement of deputing Insurance Ombudsman of one jurisdiction to handle complaints of another jurisdiction periodically.

• The offices receiving highest number of complaints are Mumbai, Kolkata and Chandigarh.

• The complaints in life insurance are more than that of general insurance over the three years. However, the gap between number of life and general insurance complaints has been closing in. The total number of complaints was less by 8% in 2017-18 in comparison to numbers of 2016-17 and this is attributable to a huge reduction of 22 % in complaints of life insurance. The number of general insurance complaints have been on the rise over the years under review. This could be attributable to the increase in health insurance business and motor insurance and complaints relating to these lines of business.

• The main types of complaints in life insurance are those relating to policy and premium paid in respect of policy (which includes unfair business practices in sale of insurance policies) (54%) and partial or total repudiation of claims (25%). In case of general insurance complaints, the major areas of grievances are those relating to partial or total repudiation of claims (90%) and delay in payment of claims (5%).

• The proportion of admissible complaints has been reducing through the years. The main bases for inadmissibility are that the complaint is beyond the scope of the rules or the customer approached IO before taking up with the insurer. The two grounds reveal poor understanding about the use of scope and procedure for availing of the facility of Ombudsman. There has to be a concerted effort and a multi-pronged campaign by ECOI, Insurance Ombudsmen and IRDAI for educating members of the public about the Ombudsman Rules, procedure for filing complaint etc.

• The disposal of complaints in customer’s favour either through settlement / withdrawal / award has been about 75-80 % during the three years indicating that large proportion of the customers who have approached Ombudsman have benefited in resolution of their grievances at no cost and minimal effort.

• In 2017-18, 90 % of the complaints disposed were decided within 3 months of receipt. However, the disposal of complaints has been generally poor in 2017-18 resulting in 38% of complaints handled remaining outstanding which was less than 10 % in previous years. The proportion of complaints pending for more than 3 months is also very high at 73% of the total outstanding. The pendency of more than 800 complaints for more than one year indicates significant laxity in disposal of complaints. The most important reasons for this is the number of vacancies in the Offices of Ombudsman over the year due to delays in selection and appointment of Ombudsmen.

• There is no provision for appeals under the Insurance Ombudsman Rules because of which there are no appeals, thereby making the decision of IO virtually final unless the Award is apparently erroneous.

• While for the complainant, the access to IO is free, for ECOI which is administering the scheme, the average cost of disposal of a complaint is about Rs. 9000-10000. This indicates clearly that that the cost of resolution of grievances by Ombudsmen is cheaper than any Court or Consumer Forum, given the fact that the awards of Insurance Ombudsmen are expressly indicated to be final as per the Rules.

Thus, IO system has ensured that the resolution of customer complaints is inexpensive, faster and more efficient given that the instances where both parties are happy with the settlement, thereby indicating the success of the Insurance Ombudsman Scheme as an effective and efficient alternate dispute resolution mechanism for most insurance consumers. However, its utility can be realized fully only when all offices of Insurance Ombudsmen are functioning throughout the year, which can be ensured through timely appointment of Ombudsmen, which was found lacking over the years.

CONCLUSION

The increasing number of Ombudsmen Offices and the growing number of complaints received by these Offices is reflective of the effectiveness as well as the trust in the Ombudsmen system as effective alternate dispute resolution mechanisms for grievance / dispute resolution in banking and insurance sector, though improvements can always be made depending on demands of consumers and need of the times.