Having tightened the ground rules for securities market constituents in the last few years, the Securities and Exchange Board of India has been training its guns on intermediaries. Its latest discussion paper, suggesting tweaks to the Investment Advisers’ Regulations of 2013, is a fresh attempt to tighten the screws on mutual fund sellers by drawing a bright line between ‘distributors’ who help investors execute transactions and ‘financial advisers’ who influence their product choices. While the changes do address conflicts of interest, they are difficult to put into practice in the nascent Indian market.

Today, mutual funds in India are sold through a mix of banks, corporate agents and over 10,000 individual distributors who earn a percentage commission on the funds they sell. A few (515) of these are also registered as official ‘investment advisers’ under the 2013 regulations and charge an advisory fee. SEBI is now proposing a black-and-white structure where all existing distributors (within three years) must define themselves either as one or the other. Thus, pure ‘distributors’ must stop providing any inputs or advice to their investors and act as mere transaction platforms. ‘Advisers’ must stick to recommendations alone, eschew transactions and commissions, and register with SEBI to meet stricter compliance norms. While corporate agents and banks will be allowed to offer both advice and execution through separate subsidiaries, individual distributors will be barred from doing this. While this sounds good in theory, ground realities suggest that neither Indian investors nor individual distributors are anywhere near ready for it. For it to work, MF advisers must be able to charge a high enough fee to sustain operations. Investors, on their part, must be willing to hire separate intermediaries for advice and execution. But the ground reality is that most Indian investors, despite being ill-equipped to make product choices, are reluctant to pay for financial advice. This casts doubts on the viability of the pure adviser model. Given this, SEBI must consider a middle road to protect investors from conflicts of interest. It must bar commission-earning distributors from labelling themselves as ‘financial advisers’ and enforce commission disclosures at the point of sale so that investors can make an informed choice. But it must also permit intermediaries to offer both advice and execution under one roof.

This apart, it needs to be recognised that it is not just MF investors, but all buyers of financial products who face conflicts of interest and mis-selling issues. While SEBI has been quite zealous in barring upfront commissions, promoting direct plans and insisting on fee disclosures with respect to MFs, agents for other financial products such as insurance or corporate FDs are subject to no such rules. To truly lift the quality of investment advice, it is imperative for the myriad financial regulators — SEBI, RBI, IRDA and PFRDA — to come together on uniform qualifications and codes of conduct.

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