Ringside view. Investment adviser, distributor — stop the hairsplitting

If SEBI’s idea is to become a norm, then financial market intermediaries can perform only one role. They can either provide advise to individual investors or distribute MF schemes.

In a revised version of its consultation paper on investment advisers that has already been through two iterations, SEBI has mooted that from April 1, 2019, registered investment advisers (RIAs) should clearly choose either advisory services or distribution of mutual fund schemes as their key role, and not do both.

The SEBI move is aimed at allaying the apprehensions of mis-selling by investment intermediaries. While the intention of SEBI is good — to protect investors from commission-hungry entities and to do away with conflict of interest, some proposals are rather difficult to implement in practise.

Among the most difficult proposals to be followed is the one on the activities that can be pursued by ‘immediate relatives’. According to the consultation paper, individuals who get registered as investment advisers should not provide any distribution services in financial products, either directly or through any of their immediate relatives. Similarly, individuals providing distribution services should not provide advise either directly or through their immediate relatives. SEBI further clarifies that immediate relative means the spouse of a person and includes parent, brother, sister or child of such person or of the spouse. Though the intention of SEBI is to prevent the RIAs who provide financial advise to clients do not run a distribution business through their spouses or relatives, enforcing such a provision may be difficult from a practical point of view and may meet challenges from a legal angle too. As an independent person every individual has the right to follow the profession of their choice. SEBI cannot make a diktat on what profession one’s relatives can pursue and whom should one marry, say aggrieved advisers.

SEBI has also mooted that there should be clear segregation between the two activities of a firm or company providing investment advice and distribution of the investment products. In relation to this, it has asked banks, NBFCs, and others to choose between advisory role and distribution. This may lead to most entities surrendering their investment advisory licence as it is very difficult to get customers to pay an advisory fee. Entities would rather prefer to remain distributors, which is an easy money spinner.

Wrong-doers need to be penalised or prosecuted rather than writing rules that are very difficult to be implemented. Even from SEBI perspective, it would need enormous effort and manpower to check the deviations on these norms. If the system can be made easy and speedy for an investor to escalate his grievance, more than half the problem on mis-selling may be solved.

Whatever may be the rules, investor awareness is the key to preventing mis-selling. To achieve that, SEBI should concentrate on retail investors, particularly with a special focus on first-time investors, who can be made aware how he or she can be duped by distributors.

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