In his latest avatar, D Swarup is Chairman, Financial Planning Standards Board India, and Member Convenor, Financial Sector Legislature Reforms Commission. As head of the Pension Fund Regulatory and Development Authority (PFRDA), Swarup was responsible for the development and implementation of the new pension scheme. He is also an authority on financial products’ distribution, having headed a panel that studied the subject extensively. In an email interview, he tells N Sundaresha Subramanian about the key issues concerning the financial sector. Edited excerpts:
You have two new assignments with FPSB and the Financial Sector Legislative Reforms Commission (FSLRC). Take us through your vision for FPSB and on the key areas you will be looking at as part of the commission.
The immediate priorities at FPSB would be to educate common people about the advantages of planning their finances and at the same time promote professional and ethical standards among financial planners and investment advisers. I would like to see FPSB grow as a highly credible institution in the eyes of all stakeholders, with the eventual goal of gaining statutory status as a regulatory organisation for financial/investment advisers.
As far as FSLRC is concerned, the main objectives are to review, simplify and rewrite financial sector laws with a view to making them more consistent with each other. The idea is to modernise and streamline all financial sector legislations by removing all ambiguities, regulatory gaps and overlaps, keeping in mind the ultimate objective of protecting the interests of savers and investors.
What are your views on loads and their role in financial products’ distribution?
Essentially, there are three parties to a financial transaction. They are the product manufacturer, the financial adviser/sales agent and the consumer. In the entire question of entry and exit loads, the discussion, so far, has been limited to the business side of the equation i.e. about how difficult it is to sell and service consumers but no one seems to have seriously considered the consumer’s point of view. Separation of the advice and sales functions is a serious effort in this direction. It only implies the cost of advice should be paid for separately and not included in the cost of the product. Ban on entry loads, to my mind, is one single factor which will go a long way in protecting the interests of investors.
Over the last two years, MFs have gone through serious reforms largely along the lines of segregating advice and sales functions. As a result, the industry has become very investor friendly. But, when it is time to reap the benefits, there seems to be a rethink following the change of leadership at Sebi on the ground that the industry’s growth is getting affected. Is this good?
Separation of advice and sales functions is essential for protecting the interests of the consumers. It is with this in view that NPS was offered to the general public on May 1, 2009 without entry and exit loads. Sebi followed with a ban on entry loads in mutual fund products from August, 2009. An expert committee constituted by the government in 2009 also recommended all financial products should go ‘no load’ by April, 2011.
I, personally, feel it will not be in the interest of the consumers if the earlier decisions taken by PFRDA and Sebi to ban commissions being embedded in product prices are reviewed. However, there may be no objection to levying a fair, reasonable and transparent transaction fee as a distinct and separate item outside the cost of the financial product.
Being the head of FPSB, what is your assessment of the impact of the entry load ban on the profession of financial planning and advisory? How are people adjusting to the new realities?
It is too early in the day to evaluate the impact of the ban on the profession of financial planners and advisers. However, it is clear such professionals will now have to give sound advice to their clients about the merits and demerits of various financial products and not be influenced by the nature and extent of the commissions they may receive in the selling of these products. In the long term, the ban on entry and exit loads would enhance the professional standards of financial planners and advisers and make them more accountable to investors.
A new Sebi committee has been formed to review, among other things, the two-cheque system of paying the advisor separately, which was implemented in 2009. Investors allege this is an effort to bundle investment and fees again and bring entry load through the back door. Is it important to keep advisory separate?
As I have already said, the functions of advice and sales should be distinctly separate and also paid for separately. This will lead to greater transparency and greater competition among the advisers, thereby improving efficiency levels.
Will FSLRC take into account the changes recommended by the Swarup panel on the distribution of financial products?
FSLRC has been asked by the government to consider the suggestions and recommendations of all committees set up earlier by the government and the regulators to improve the financial architecture in the country. The recommendations of the committee on investor awareness and protection would, therefore, be considered by FSLRC.
A few industries like wealth management, Sahara’s fund-raising through OFCDs, etc, thrive due to regulatory arbitrage or some grey areas in the existing rules. How will FSLRC address these?
One of the terms of reference of FSLRC is to examine the regulatory overlaps, gaps and arbitrage. The Mistry and Rajan committees have also given recommendations in this matter. FSLRC will review this issue in great depth and come out with implementable suggestions.
