Sebi likely to revisit proposals on investment advisor regulations

The Securities and Exchange Board of India (Sebi) is likely to do a rethink on most of its recent proposals to amend investment advisor regulations, after flak from the distributor community, including banks.

The regulator had come up with a consultation paper in January, proposing a blanket ban on individuals and their immediate relatives acting as distributors from offering any sort of advice. Similarly, individuals registered as investment advisors would not be allowed to provide any distribution services in financial products.

Banks, non-banking financial companies, body corporates, limited liability partnerships and firms registered as investment advisors would not be able to distribute products, directly or through a holding company, associate company or subsidiary.

The proposals faced a pushback from banks, national distributors and independent financial advisors (IFAs) alike. Most banks and corporates have segregated their distribution and advisory business. The proposals, if implemented, would have compelled these entities to choose between the two. Seven of the top 10 distributors by way of commission paid for 2017-18 happen to be banks, shows data from the Association of Mutual Funds in India.

The new norms would have driven most of the business to the distribution side, said experts. Distribution is a straightforward business model, wherein the distributor receives a certain commission, either trail or upfront. Charging fees for advice, on the other hand, is not so popular in India.

Impact of new proposals

• Inflows through banks to get impacted
   
• Seven of top 10 distributors in FY18 are banks
   
• Business likely to shift to a pure distribution model
   
• Penetration of mutual funds (MFs) in smaller cities may be hit 
   
• MF distributors may gravitate to selling insurance products 

"Not allowing companies to segregate advisory and distribution services, even through a subsidiary or an associated company, might not stand legal ground. Similarly, disallowing immediate relatives from offering advice or distribution services is not practical and can be legally contested," said a person on condition of anonymity.

Unlike the blanket ban on advice mentioned in the proposals, Sebi is now likely to allow distributors to offer incidental advice, provided it is targeted only at wealthy individuals. Current norms allow distributors to offer incidental advice to all categories of clients.

"We have seen in the UK the consequence of banning distributors from giving advice. Today, small investors there don't have any access to advice. You can’t stop incidental advice, as it is but natural for a client to get some inputs from the distributor on suitability of a product for him, given his investment goals," said A K Narayan, former president of IFA Galaxy, a Chennai-based IFA association. According to him, it's the IFAs and not the registered investment advisors (RIAs) who were responsible for building the robust SIP (systematic investment plan) book. Mutual funds (MFs) now get Rs 50-60 billion every month through SIPs. “Incidental advice should suffice to serve the majority of clients. In the final analysis, it should be left to an investor, whether high net worth individual (HNI) or retail; whether he wants to opt for an RIA or a distributor," said Mukesh Dedhia, director, Ghalla & Bhansali Securities.

The proposed changes would have also hampered MF penetration in smaller cities, as these investors need hand-holding. One of every six rupees invested by individual investors in MF schemes now comes from beyond the top 30 cities (B30). As of April, the assets under management from B-30 locations stood at Rs 4.02 trillion; those from the top 30 (T-30) centres accounted for Rs 19.2 trillion. This translates into a share of 17 per cent for the B-30 locations.