It appears that SEBI has taken a step back on RIA regulations and has decided to give the issue more consideration - contrary to the situation end of last month, where it appeared to all that it had made up its mind to implement RIA regulations more or less along the lines of its discussion paper.
Clearly, the efforts of FIFA, FIAI, UF, AMFI and all those who made strong representations, have helped in getting to a situation where SEBI is now re-examining its stand. But what seems to have tipped the scales is help from international experts - who form the core of SEBI's International Advisory Board. Here is an extract from the published minutes of SEBI's recent International Advisory Board meeting:
Migration from Commission Based to Fee Based Advisory Model
The IAB took note of the extant framework for investment advisory business in India including role of mutual fund distributors and regulatory arbitrage between the investment advisor and mutual fund distributor providing advice. The board also took note of the international regulatory developments aimed at addressing inherent conflicts of interest and introduction of more transparency in relation to inducement and commissions received by financial advisers and distributors in jurisdictions like Australia, United Kingdom, USA, Canada, European Union and Singapore. The IAB also deliberated on Robo Advisory. The IAB advised that fee for advice is the journey which needs to be completed. The IAB however advised that the proposed migration needs to be calibrated. The IAB made the following observations in this regard:
- Commission based as well as fee based approach to investment advisory can co-exist for the time being. The transition from commission to a fee based approach has to be gradual. Such transition has to happen in tandem across regulatory segments to have uniformity in regulatory stringency across competing segments like securities market, insurance and pension businesses.
- Regulators need to keep in mind the financial viability and the business model of the advisory business. Proper due diligence before transition in regulatory regime is essential.
- Distinction between retail and sophisticated investors should be clear. There is a felt need for greater awareness among investors on cost of commission versus fees based advisory.
- More transparency is required on distributors’ commission in all financial products.
- Before undertaking any effective steps, SEBI may consider undertaking a study of migration to fee-based advisory model under RDR, FOFA and robo-advisory models.
- Promote ETF investments as they entail low investment management costs.
There is a clear direction given to SEBI by its IAB to:
1. Move ahead with a fee based model only when it is possible to implement this across all financial products including insurance
2. Conduct an impact analysis on viability of intermediation models before attempting to push through a fee based model, and
3. Conduct an independent review of the actual experience in the UK (RDR) and Australia (FOFA) to understand better the pros and cons of such a move.
4. Allow commission based as well as fee based advisory to remain for now.
What SEBI's IAB has said is exactly what our industry participants have been repeatedly asking SEBI to do. The irony of the situation is that while SEBI keeps talking about embracing international best practices, it is finally a set of international experts who have asked SEBI to take a step back and not rush through with its RIA proposals.
Out of the 4 international members of SEBI's IAB, one is a former chief of New Zealand's market regulator and a leading light in IOSCO, the second is a leading European academician and expert on regulation of financial instututions, the third is one of Asia's leading fund industry experts having worked with HSBC, Morgan Stanley and Nikko and the fourth is the ex chief of Hong Kong's market regulator.
Our industry should indeed be grateful to these luminaries who have asked SEBI to pause, think carefully and act wisely. Now that we have all the recommendations of the IAB on record, SEBI will have to address these recommendations satisfactorily before pushing through its RIA proposals.
As the IAB mentioned, this is a journey that must be completed, but needs to be carefully calibrated. It would be prudent to assume now that there will perhaps be no immediate rush to complete this journey with undue haste. Distributors will be relieved that the issue of not being permitted to give incidental advice may now go to the back burner, after the IAB's specific recommendation to permit commission based as well as fee based advice to co-exist.
Distributors through their associations - led by FIFA and FIAI - have worked tirelessly to help SEBI understand the pitfalls of its proposal. I guess when you put in a lot of sincere effort, you deserve that slice of luck too in the form of support from unexpected quarters - which is what came our industry's way in the form of the guidance from SEBI's International Advisory Board.