SEBI Proposes Third Consultation Paper On Its IA Regulations
The SEBI (Securities Exchange Board of India) is finding it challenging to roll out a final framework for the Investment Advisers Regulations, 2013. Understandably so, as there’s no cut and dried solution to the tricky problem it’s trying to solve here. Since 2013, the market regulator has been trying to get a fix on the problem of segregating ‘advisory’ and ‘distribution’, in order to create an environment that’s free from conflict of interest.
Earlier, SEBI had issued two consultation papers on October 07, 2016 and June 22, 2017 seeking public comments on proposed amendments to SEBI (Investment Advisers) Regulations, 2013. Both papers were hotly debated, with camps divided in their opinions about whether it was feasible – or even beneficial to clients – to segregate Investment Advisory from Mutual Fund Distribution. (Read my previous article “Is India RIA Ready?” which discussed the implications of the first consultation paper)
SEBI’s intent is to ensure that “Advisors” establish a fiduciary relationship with their clients, wherein they earn zero commissions from underlying products, and are remunerated directly by their clients instead - based on a mutually agreed fee structure.
A press release from SEBI’s website yesterday stated that “based on the feedback received from the consultation process and the meetings with various stakeholders, it was felt that there is a need to prevent the conflict of interest between advising for investing in financial products and selling of financial products”
Per yesterday’s press release, it would appear that another consultation paper is in the offing. This time round, the paper will focus on two core issues.
The first issue that the next paper will address is whether or not there should be a clear segregation between the two activities of anentity, that is – “providing investment advice” and “distribution of investment products/ execution of investment transactions”. This isn’t something new. In fact, this point has been the core issue of the regulations right from the beginning, and a workable solution hasn’t been forthcoming as yet. Several large IFA’s (Independent Financial Advisors) have been vocally critical of the move, even going on to hypothesize that it would eventually increase the costs borne by smaller investors as a percentage of their overall assets. Some members of the community view this as a moot point, as they believe that a flimsy “Chinese Wall” is all that it’ll take to ensure that the regulations are complied with, while carrying on the business of distributing while advising as usual. Still others believe that since upfront commissions on Mutual Funds were abolished in 2009, there’s precious little that an IFA can do in terms of ‘tailoring’ their recommendations to maximise their earnings anyway!
The second issue that will be raised in the paper is “whether or not Mutual Fund Distributors (MFDs), while distributing their mutual fund products, should be allowed to explain the features of products to client and ensure the principle of ‘appropriateness’ of products to the client”. This is a tricky point. How the regulator intends to draw the line between “advising” and “ensuring appropriateness” is to be seen. More precisely, what’s the tipping point where the MF Distributor ends up dispensing “too much” advice while ensuring appropriateness, and thereby violates regulations? More importantly, how will this be audited?
As the Mutual Fund Advisory and Distribution community awaits the next consultation paper, the regulator faces mounting pressure to take the IA regulations to a logical conclusion that will benefit clients the most, while continuing to feed the growth of the Advisory community.
