Allow MF distributors to give incidental advice to investors, says forum

Sebi proposes that such distributors would have to register under Sebi's IA Regulations

An association of mutual fund agents has suggested the markets regulator Securities and Exchange Board of India (Sebi) to allow distributors to give incidental advice to investors, terming it an essential component needed by customers to buy products.

Sebi, in October, came out with a consultation paper, wherein it proposed mutual fund distributors should not be allowed to provide incidental investment advice with regard to mutual fund products.

According to the proposal, distributors providing such advice would have to register under Sebi's IA Regulations. Sebi has sought comments on the proposal till November.

United Forum, a forum of various distributor associations across the country, believes that the proposal would gravely affect the service mechanism of distributors and would be harmful to investors. It would be detrimental to the growth of the mutual fund industry as investors can move to unproductive assets.

"To stop investors from receiving advice from distributors is clearly not a step towards investor protection," United Forum Spokesperson Dhruv Mehta said.

Under the current regulations, a distributor is obliged to ensure that an investor buys a product which is appropriate and suitable for the investor.

"By disallowing this, Sebi, in fact, will be encouraging mis-selling or mis-buying," he added.

The proposed regulations are suggesting a compulsory move from a commission-based distribution system to a fee-based distribution. Currently, the investor has a choice. Sebi is proposing to remove this choice.

United Forum said it is learnt that more than 80 per cent of public opinion received by the regulator were against the consultation paper.

The forum has suggested for allowing the distributor to be registered as an investment advisor and the distributor should be permitted to offer a fee-based and/or a commission-based service giving the investor the option to choose. Such a hybrid model is present in the Unites States.

The forum is of the view that the proposal would be detrimental to the growth of the mutual fund industry.

"Not only the existing mutual fund assets can move to unproductive assets like gold, etc but the new growth and assets which were to come to the industry will get impacted," the forum noted.

"The move would also see a sharp decrease in the number of distributors as their business becomes unviable and a lot of existing investors will get orphaned," it added.

Currently, there are about 80,000 registered distributors, who in turn have sub-brokers and employees distributing funds.

The total number of people employed could be over a lakh.