|
About United Forum
United Forum is a forum of several national, local and regional associations of distributors
and independent financial advisors (IFAs) like FIAI (Banks & national Distributors Association),
FIFA (IFA Association) and 43 other Regional IFA across the country. Thus it represents almost
the entire financial distribution Industry of the country. The various associations under
United Forum have been engaged in undertaking various activities for the development of
the mutual fund industry and distribution Industry.
Views on the paper
United Forum has written on behalf of its members in reference to the invitation for
comments on the Consultation Paper on Amendments/Clarifications to the to the SEBI
(Investment Advisers) Regulations, 2013 ("Consultation Paper").
While the proposals in the SEBI RIA Consultation Paper purport to bring in uniformity in the
standards applicable to all intermediaries and address regulatory gaps, we believe that the
many of the proposals would be detrimental to the interest of investors and not be in
accordance with the orderly development of the securities market. It may appear that
making registration under the IA Regulations mandatory, for all mutual fund distributors
providing incidental advice, would help regulate them better. However, such a measure
would not only unreasonably disrupt the activities of distributors (Independent Financial
Advisors, national distributors and banks distributing financial products) and compromise
financial inclusion, it would also be against the interests of investors. The ramifications of
the Consultation Paper, if implemented in full, would be catastrophic for the growth of
the financial products industry and largely defeat the financial inclusion agenda of the
government and the regulator.
The proposal to remove the existing exemption granted to mutual fund distributors,
under the IA Regulations, for providing incidental investment advice would gravely affect
the service mechanism of distributors, and be harmful for investors. Firstly, it is pertinent
to note that distributors perform several essential and critical functions in India. A
distributor is not only responsible for marketing and selling mutual fund products, but also
provides a range of services, both at the time of onboarding and on an ongoing basis, which
greatly benefits investors, especially in the retail category. Distributors reach out to
investors in small and large towns, make investors aware about their needs and goals,
schemes of mutual fund houses and help them understand the effectiveness of mutual fund
schemes for investments. Distributors help investors undertake transactions relating to
switching, redemption and guide them periodically on the performance of their
investments. Distributors monitor and review client portfolios to ensure that their
investments suit their financial abilities and risk profile, and match with their overall financial goals. Further, distributors provide services to investors relating to their funds,
such as aiding in nomination, calculation of taxation etc.
The nature of work of distributors entails an advisory component. We believe that the
essence of incidental advice is very important for any financial distribution activity, lest
the product may have harmful effects on the investor. Further, regulatory norms make it
mandatory for distributors to sell only appropriate products after conducting the requisite
process for assessing suitability of the products to the client's age, profile, pension aim and
risk profile. A product appropriate for an upper middle class salaried person may be wholly
unsuitable to a lower income person with a small shop. Pursuant to SEBI's circular dated
August 22, 2011, distributors are duty bound to sell only suitable products to clients after a
detailed profiling and assessment of the income, expenditure, wealth and risk appetite,
retirement plan, time horizon for investments, taxation, goals etc. Removal of the advisory
element would not only unreasonably limit the role of distributors but also expose investors
to investments in unsuitable products. If distributors are not permitted to provide
investment advice, as an activity necessarily associated with their distribution function, they
may sell products without a check on the investor's risk profile. This move is clearly harmful
to investors as the proposed regulation is reducing the obligations and level of service of
the distributor. Further, as discussed, a distributor does not merely act as a courier for fund
applications but provides several other critical services. Without the aid and advice of
distributors, unsophisticated investors would make investment decisions that are unsuitable
for them and expose themselves to market risks beyond their risk appetite or make
inappropriately safe investments where inflation would eat away at their returns leaving an
inadequate pension pot.
Secondly, the registered investment advisory model would not be feasible or workable for
distributors. The Consultation Paper proposes that advisory services can be provided only
through a separate subsidiary. If existing IFAs were to register under the IA Regulations, it
would become impossible for such individual distributors to undertake both distribution
and advisory functions as the current proposal will prohibit that. In addition, it would be a
death knell to expect a small distributor say in Nagpur to set up two companies for advisory
and distribution functions. Since, both entities would be run by the same person, even
where such corporate entities are set up, the additional requirement does not solve any
problems. Further, the IA Regulations prescribe a minimum net worth of Rs. 25 lakhs for
body corporates to be registered as IAs. This is an excessively high threshold which
numerous existing distributors may not be able to meet. Finally, today a distributor collects
commission from the manufacturer. Even assuming, the split roles/entities are viable for
some of the distributors, expecting an advisor to charge say Rs. 5,000 as advisory fees for
the year would make little sense for a small investor who wishes to invest say a monthly SIP
plan of Rs. 1,000. The advisory fee would be an astronomical number for such an investor
and a rational small investor would abandon such a market altogether.
In the current paper the proposal may force most of the Banking players to close the MF
Distribution business. Banking is a very strong Distribution channel for the growth and
financial inclusion of investors in the MF Industry, Banks cannot provide Mutual Funds as
an investment product without an incidental advice element which is being suggested in
this paper. It is not practical for them to set up another subsidiary to run the distribution
through incidental advice activity. Today the distribution of products is done by thousands
of employees spread across the smallest district of India. Several branches may have only
one or two employees, of which one may be engaged in multiple activities including
distribution of financial products. To mandate a separate company to provide advice and
one probably to provide distribution apart from the banking company, to mandate Chinese
walls in a small two employee branch in a small district of UP, to mandate NISM certification
from this employee, these will all effectively stop not just new businesses but even push
banks to shut their distribution of mutual funds, as its neither practical nor cost effective.
Currently, there are approximately active 46000 ARN Holders in a population of 130
crores. The proposals if implemented would force a considerable proportion of the
distributor community, at least 70-80 % out of the distribution business and the MF
Industry would virtually vanish from the market. This will lead to large amount of
disservice to existing investors who will be orphaned on their portfolios and also new
investors will not be brought to the Industry. The existing assets of the Industry will also be
at risk since they can go in other alternate products and investors may take irrational
decisions given lack of advice. The skill India and Entrepreneurship push program of
Government of India will also suffer since financial Distributors will more or less seem to
vanish .
Thirdly, the proposals would compromise with the level of financial inclusion in the
country. There is a huge and pressing need for expanding mutual fund investments, and as
discussed, distributors are a crucial part of realising this potential. More than 85% of longterm
funds in India are distributed through banks, national distributors and IFAs. The Sumit
Bose Committee Report has highlighted the role and significance of distributors in educating
the customer about modern finance and financial products, especially push products such
as mutual funds. Investors typically lose money from bank fixed deposits post inflation and
it is critical for the financial health of any person to invest in higher return products. The
National Pension Scheme itself invests significant amounts in equity investments.
Most retail investors need help, guidance and service for savings and investing. Various
surveys have indicated that Indian investors consider the role of distributors and advice as
a key to their decision making process and do not have concerns regarding mis-selling, or
pricing of products. In fact, with the intervention of distributors, investor savings and
investments in financial products have gone up. There is a lot of hand holding that
investors, especially retail investors, need from time to time for their investments. Hence, at
this stage removing distribution in a meaningful role will be detrimental to the Indian
investors. Retail customers may not seek advice from registered IAs because of the upfront
advisory fees required under advisory model. While a Family Office with assets of more than
Rs. 1 crore would engage an RIA, a person investing in an SIP of Rs 1000/- would not
approach an RIA. By not permitting distributors to provide incidental investment advice
without a separate IA registration and driving distributors away from their business, retail
penetration in financial assets like mutual funds would suffer. Absence of a large
distribution network will see households savings once again shift to unproductive physical
assets like gold and result in a drastic fall in the reach of mutual fund products to
households across the country, especially in B15 towns. The role of distributors is very
important in educating and penetrating the retail customer base. Without proper regulatory
structure, financial inclusion would be compromised.
The international experience in other jurisdictions viz. UK which moved towards only fee
based advice is not encouraging from the point of view of retail investors. Specifically in
UK after the implementation of RDR the following outcomes are clearly visible as the
guidance gap for retail consumers has increased significantly for the following reasons.
Firstly, it has lead to insufficient assets of retailers making advisory services /fees unviable
for retail investors. Secondly, it has led to a huge fall in the number of advisers reducing the
supply substantially resulting into several customers being orphaned. Thirdly, there has
been unwillingness of customers to pay fees comfortable with embedded fees. Lastly,
unbundling actually has increased the expense ratio of customers. The above outcomes are
not all in favor of retail customers an\d the changes recommended in the paper are only
leading towards such consequences which are not at all desirable or in the interest of
investors.
We believe that the proposal to make registration mandatory for distributors providing
any advice is based on certain misplaced assumptions, such as, financial intermediaries
like distributors would not act in the interest of customers. It is also based on a fallacious
premise that creating two corporate entities will solve some of the problems which
plague the markets today. We are hoping that the proposed regulatory changes in the
Consultation Paper are relooked in the interest of the investors, Distributors, Financial
Inclusion and the growth of the Industry.
Share this article
|
Industry Trends