imgbd Advisor Speak

We need evidence based, not perception based regulations

Dhruv Mehta, Chairman, FIFA

26 September 2016

In a nutshell

FIFA, which now represents IFAs from 120 cities across India, is gearing up to engage with the regulator on its proposed consultation paper on the RIA regulations - a paper which will likely have a far reaching impact on business models across MF distribution, including IFAs. Dhruv believes it is time we move away from a perception based regulatory environment to an evidence based one - where rules are made and changed based on clear evidence of the need for change, not merely a perception of a need for change. And that evidence must include the voice of the investor. Have we really asked investors whether they are unhappy or feel vulnerable in the present environment where they have choice of multiple intermediation models? Dhruv questions the rationale of creating and changing rules for the benefit of investors, when nobody has gone and asked them their views.


WF: FIFA has now gained significant muscle with members of two very influential distributor groups - MF Chain from Western India and DFDA from Northern India, now coming on board as FIFA members. What is the geographic spread of FIFA now and what in your opinion has enabled FIFA to establish a truly national and inclusive footprint?

Dhruv: FIFA now represents distributors from 120 cities and towns across India. In that sense, we have a complete national footprint, and represent IFAs on a pan-India basis. The other aspect is as you said, with members of MF Chain and DFDA joining FIFA, we now represent I think the entire spectrum of business models in the IFA space. Some of these members of MF Chain and DFDA are stalwarts in the retail distribution space, and I am sure they will add very rich insights into our discussions and deliberations on industry issues. When FIFA engages with any trade or regulatory body, the counter-party can rest assured that we are truly an inclusive and representative pan-India body of IFAs.

When I look back at the time FIFA commenced its journey, there were a lot of misconceptions about FIFA - that it is a Mumbai oriented entity, that it is a "big boys club" and so on. When something is new, I guess people will be circumspect. But over time, as IFAs saw the consistent efforts that FIFA and its dedicated members have been putting in on diverse fronts - research based regulatory engagement, trade body engagement and knowledge sharing, IFAs from across the country began to appreciate the sincerity of effort.

Then came the two issues that really jolted IFAs - the issue of service tax and the way it was handled and then the issue of commission disclosure. There clearly was an urgent need to have one voice that speaks for the entire IFA fraternity. I think what many IFAs saw was that FIFA has been sincerely trying to present a mature, constructive and rational perspective of IFAs to the regulatory and trade bodies. We also made every effort to reach out to IFAs and associations across India to take their inputs in preparing our submissions. That I suppose made many IFAs get off the fence and come on board to strengthen FIFA and present a truly united voice.

WF: SEBI's Board has now decided to review RIA regulations, and it appears that the exemptions for MF distributors are likely to be taken away, paving the way for a push towards more RIA registrations. What is your thinking on this move and in what ways will FIFA participate in the forthcoming consultative process?

Dhruv: SEBI's press release says that it intends - among other things - to review the exemption given to MF distributors from becoming RIAs. If you look at the original draft regulation, there were no exemptions. During the consultation process of that time, we represented to SEBI that MF distributors offer advice which is incidental to their basic distribution business, and therefore should be kept out of the RIA ambit. At that time, it appeared that SEBI's primary focus was targeting those "advisors" who were not registered or licensed by any authority - the type of people who would give day trading stock tips, market tips etc and who charged fees for such "advice". MF distributors were licensed by AMFI, insurance agents by IRDA and so on. So the focus was on those who "advised" without any form of license or code of conduct. In that context, when the final regulations came out, SEBI decided to exempt all such persons who are licensed by another authority and have to abide by that authority's code of conduct. So, apart from MF distributors and insurance agents, even Chartered Accountants, lawyers etc were exempted from the purview of RIA regulations.

In the last 3 years since RIA regulations have been enforced, SEBI has clearly expressed its unhappiness over what it perceives is a very small number of people who have registered themselves with SEBI as RIAs. What we don't want is a situation where regulations are being reviewed merely because certain targets have not been met. The objective cannot be to achieve a certain level of registrations. The objective should be to see whether something is not working in the present arrangement, which needs to be fixed. The objective of this review needs to be made public by SEBI. I do hope in the consultation paper that is expected shortly, the objective of this exercise is clearly spelt out.

When reviewing regulations, it is very important for the regulator to take the investor's perspective. I am talking about actual evidence of what investors want, and not a perception of what they want. The world over, regulators are increasingly moving towards evidence based regulation and consciously away from perception based regulation. Regulators are very powerful and their perceptions - whether right or wrong - can materially influence rules of conduct of business and the way investors are served. Regulators in mature markets understand the power they have, and are committing themselves to evidence based regulation, in an effort to stay away from measures that they may take based only on perceptions, which may not be true. We are unfortunately still in an era of perception based regulation. Rules are framed and revised based on a perception of what investors want, based on a perception of what is good for investors.

A recent example is mandating disclosure of absolute commission amount as against total costs in CAS statements - this again seems to be based on wrong perceptions of TER and commissions being high - FIFAs study on expense ratio destroys that myth.

We need to have a situation where the regulator first engages with a wide cross-section of investors to understand what they want, where are they feeling vulnerable, what kind of checks and balances they really want in order to feel more confident in making investment decisions. And we need the findings of this engagement process to be made public. That would be the first step towards evidence based regulation.

Then there is the issue of giving an investor choice. You have given him choice between direct plans and regular plans. You have given him choice between RIAs and distributors. You are now giving him additional options in the form of e-commerce platforms. Giving choice is the right thing to do. And then, let the investor decide what he wants, based on his needs and circumstances. Why then do you want to say, "let's now migrate all distributors who give advice to the RIA fee based model". Have investors told any forum or appealed to any regulator that they prefer paying fees to the advisor rather than having his compensation embedded in the product cost?

It will be for every stakeholder's benefit - chief of all the investor's benefit - if we can move towards an evidence based regulatory environment rather than remain in a perception based one.

The RIA regulations have been introduced just 3 years ago. We have been requesting that the discrimination against Individual IFAs (who are not allowed to have a separate SIDD) be removed. But, rather than acceding to this request, Corporates will be asked to make subsidiary companies! The Government's mantra of " Ease of Business "'is not applicable to regulated entities.

From an investor protection perspective, distributors anyway are obliged to ensure product suitability before every sale, commission disclosures have been enhanced, mis-selling regulations have been tightened and EUIN has been enforced to pin-point the person involved in every transaction. So, its not as if investors who deal with distributors are unprotected while those who deal with RIAs are protected. The RIA has additional fiduciary responsibilities because he charges a fee. Ideally, an investor should have a choice of going direct, going to a commission only distributor, going to a fee only advisor or going to a hybrid model intermediary. Let the investor decide what is right for him - why should somebody else make that decision?

Coming to the second part of your question, which is about what FIFA will now do - I guess the first thing is to wait for the paper to be published and study it carefully. Then we need to form a team drawn from IFA volunteers from different parts of the country, who will seek feedback from all members, collate these responses, do independent research on the various aspects discussed in the consultation paper, bring to the table global best practices and experiences and in this process, shape a comprehensive, well researched response from FIFA to SEBI on the consultation paper. This will involve a lot of time that these volunteers will have to take out from their own businesses, for this exercise. This will mean a lot of sacrifices that these volunteers will be making, for common good. Fortunately, FIFA is blessed that it has many such committed members who have made these sacrifices in the past, and I will count on a similar collective effort again, so that we can help in whatever way we can, to influence the direction of this regulation which is going to materially impact all of us.

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