imgbd Advisor Speak

Let's tackle the core of our regulatory woes

Dhruv Mehta, Chairman, FIFA

31st March 2016

Dhruv believes that trust deficit lies at the core of all our regulatory woes. We live in an environment where the regulator does not trust distributors or fund houses to do what is right for investors. Such an environment is not conducive either for market development or investor protection. We need to tackle the core of the issue - which is trust deficit - rather than individual circulars.

There is a move afoot in the industry to enlist the support of promoters of financial services conglomerates who have high credibility and professional standing in the country, to engage with the regulator in an effort to deal with this core issue. Unless the fundamental issue is addressed, distribution will continue to shrink - particularly the IFA segment, which deprives retail investors of much needed advice and guidance.

Dhruv lists 8 key points which we must take to these business leaders and impress upon them to share with the regulator, in a bid to address the core of the issue so that all stakeholders can genuinely contribute towards the shared objectives of market development and investor protection.


Trust deficit is at the core of our regulatory woes

A business environment that is mired by trust deficit is never conducive for growth and development. For any business to grow and serve its customers well, all stakeholders of that business must have mutual respect and trust for each other. In such an environment, we can collectively achieve a lot. In the absence of such an environment, we don't move forward, and more often than not, we regress.

The sequence of regulations on mutual fund distributors in recent years has a clear pattern that suggests lack of trust in the ability and willingness of distributors to serve their clients well and treat them fairly. As if that was not enough, the advent of direct plans 3 years ago has resulted in another dimension of trust deficit - this time between AMCs and their distributors, as both are competing for the same clients, one with a pricing advantage that the other doesn't have.

The latest circular from SEBI on distributor commission disclosures and AMC salary disclosures is another symptom of the deeper malaise - our regulator simply does not trust either the AMCs or the distributors to do what is right and fair for investors. Rather than engaging the industry on their concerns and seeking viable solutions to address their concerns, our regulator has chosen to "put pressure" on "errant" distributors and fund houses, to make them "fall in line" with what the regulator perceives is the "right" thing for the investor.

SEBI is unwilling to hear distributors as well as fund houses

It appears that SEBI is unwilling to hear AMFI or AMC CEOs who meet them to sensitize them about potential impact of regulatory changes. Again, a clear symptom of trust deficit. So, what do we do now? Yes, there are suggestions about agitations and litigation - but a lot of this is said in the heat of the moment, and may not really give us the outcome we want. We don't want to widen the trust deficit. We need to find ways to bridge it. We need to find ways to engage with the regulator - we need someone to have a mature conversation with the regulator, understand what at the core is bothering them, and then work with them to find solutions that genuinely serve investors well and develop the market in a healthy manner.

There are some discussions underway to seek the intervention of influential promoters of financial services conglomerates, who have the necessary credibility and professional stature in the country, to engage with the regulator for this purpose. This is a great idea - we must support it. Equally, its important for us to provide a useful context to these business leaders to enable them to get some critical points across.

Perspectives that we need the regulator to appreciate

To my mind, these are some aspects that need to be highlighted to the regulator:

  1. The mutual fund industry (fund houses AND distributors) has been playing a key role in channelizing household savings into capital markets - which is a key priority for this Government. In this financial year alone, at a time when FIIs were exiting India due to issues unrelated to our country, it is the savings that our industry mobilized, which supported the market and avoided market panics and crashes. This has been recognized by no less than the Finance Minister, Mr. ArunJaitley himself. A look at equity mobilization numbers as well as new folios opened in this financial year demonstrate that the overwhelming proportion came through more than 25,000 active MF distributors spread across the country - much more than what came from direct plans or through the couple of hundred RIAs. Crores of investors were protected against a market crash due to the stabilizing influence catalysed by our industry - and led by its distributors. The economic value of fund distributors has been eloquently underlined in this year itself. The Government and its regulatory arms ought to recognize our key role and support our growth rather than work overtime to marginalize us.

  2. Regulatory activism that is stemming from trust deficit is doing nothing to serve the interests of investors, but doing a lot to breed confusion and discontent in those who serve the investors. Disclosure of absolute amounts of commissions of top distributors which was introduced a few years ago has done nothing to enable investors to take better informed investment decisions. By extension, the current move to extend this diktat to cover senior management teams of fund houses, also achieves no purpose except breed gossip and discontent within the industry.

  3. Disclosure of absolute amounts of commission in account statements clearly stems from a belief that distributors are earning "too much". It is the same regulator who leaned on AMFI only recently to introduce commission caps to a level that satisfied them. Then came a phase where the regulator leaned on AMFI to lean on fund houses who did not want to follow the best practice circular, and got them to "fall in line". Once this was achieved, one would imagine that the regulator would believe that they have effectively tackled this notion of distributors being paid "too much". Why then does the regulator come up now with heightened commission disclosures in account statements? Why are they so keen that investors get into the picture on a commercial arrangement between fund houses and distributors, which incidentally has been capped only recently due to the regulator's active interest in the matter?

  4. Why is it that the capital market regulator is actively working to reduce the role of a commission earning intermediary while the insurance regulator is doing exactly the opposite? Even the Government recognized the challenges that regulatory arbitrage is posing in the industry and constituted the Sumit Bose committee to find ways of tackling this issue. Why is the capital market regulator working towards increasing the regulatory arbitrage without even waiting for the Government to act on the Sumit Bose committee's report? Should not SEBI hold its horses until the Government states its position on the matter of remuneration for financial intermediaries?

  5. The mutual fund industry has been unable to attract new talent into fund distribution as the revenue models are unattractive and hopelessly unstable. The regulator has not, despite all its efforts, been able to attract a material number of RIAs - because that revenue model is found unviable by a vast majority of entrepreneurs who have relevant experience in this business. While the regulator keeps telling the industry to see the "writing on the wall", its equally important for the regulator to do likewise. The regulator is charged with the dual responsibility of protecting investors and growing the market. Many of its recent efforts do nothing to incrementally protect the investors, but are doing a lot to destabilize the market. As mutual fund distributors continue to seek greener pastures outside this business, it is the retail investor who will be deprived of honest advice and excellent service which the humble IFA delivers. This is clearly not in the interests of investors.

  6. SEBI would do well to study the impact of RDR on the UK market. It is now well documented that the number of advisors has actually shrunk and not increased and that fee based advisors usually seek to serve only HNI clients as retail clients cannot afford their services. Retail investors have lost out in the UK, consequent to their regulator's attempts to move from a commission oriented intermediation model to a fee based model. Since regulators are keen to share best practices among each other, practices that didn't work out must equally be taken on board.

  7. A more mature course of action is for SEBI to publish a white paper which puts out clearly its concerns and seek constructive dialogue with the industry on how to resolve these concerns. In this white paper, it must in the interest of transparency, spell out what data/reports/surveys it has reviewed which give rise to its fears that investor interests are being compromised in some ways. Whatever this information is, should be studied by the industry as well as the regulator to see whether there are systemic issues that need to be dealt with through new regulations, or individual instances of excesses which need to be dealt with through appropriate enforcement and action.

  8. Rather than approaching the situation from mistrust of all, leading to unilateral decisions, the regulator should adopt a more constructive approach of healthy dialogue and debate and a genuinely open mind to listen to suggestions. Transparency has to be a two-way process. The regulator, I am sure, will be pleasantly surprised to see how constructive we can all be in addressing any concerns they have which are borne out of facts, if we know that we finally are operating in an open environment of mutual trust and respect. Taking people with you always works much better than trying to go it alone.

FIFA and its members with full heart and clear mind sincerely believe that "When we do our job right, there is absolutely no friction between what we do for our clients and what we do for our families and ourselves".

We make a living and a Life by virtue of the Excellent service that we give.

We do well by doing Good

We are all committed to Excellence

And we derive immense pleasure in watching the spread of mutual funds as a preferred instrument of household savings....... the pleasure and pride of being the change agents in this transformation.

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