A survey of retail financial intermediaries (RFIs) conducted by Price Waterhouse under the FIRE (Financial Institutions Reforms & Expansion) Project reveals a high degree of fluidity in retail financial intermediation. It also brings to the fore the fact that a majority of RFIs are unregistered with any regulatory authority. Even in the secondary market, only 38 per cent of sub-brokers are registered.
The survey further states that the distribution of products takes place through a chain of intermediaries. "The chain starts with the issuer, which includes manufacturing companies, non-banking financial companies, mutual funds and other corporates selling financial instruments ranging from stocks, debt instruments and fixed deposits, mutual fund units and collective investment vehicles. The next level comprises the wholesaler of financial products, the merchant bankers and brokers which deal with large investors and other intermediaries. The final level consists of agents and sub brokers who primarily deal with retail investors," says the report.
As regards fluidity in the distribution chain, the Price Waterhouse report states that there is no clear definition of the role or responsibilities of retail financial intermediaries. They all try to sell an assortment of products and have ambiguous and unstable relationships with issuers and other intermediaries, the report adds.
It further states that there exists fluidity in affiliations between various retail market intermediaries. "An intermediary may be involved in the distribution of varied financial products and may transact with more than one broker for the same financial product. The respondents who identified themselves as either dealing in the primary, secondary or the fixed deposit market are found to earn a substantial proportion of their income from other financial products," says the report.
The survey reveals that primary market brokers earn 23 per cent and 12 per cent of their income from the secondary and fixed deposits, respectively. Even secondary brokers do not earn all their income from the secondary market. Similarly, sub-brokers also earn a large chunk of their income from varied financial products. Fixed deposit agents earn only 45 per cent from fixed deposits, primary market sub-brokers earn 32 per cent from the secondary market and secondary market sub-brokers earn only 63 per cent from the secondary market.
"There is a lack of clarity about the functions and responsibilities of retail intermediaries towards each other and towards their investors. The outcome of this is an environment where the blame is continually shifted from one participant to another, adversely affecting investor confidence," says the report.
The survey also brings to the fore the fact that only 25 per cent of all brokers and 22 per cent of all sub-brokers have undergone formal training to conduct their business. Even this appears to be a substantially high figure for there are very few institutes offering any quality training programme in retail financial intermediation.
"Though the survey reveals that the RFIs are reasonably well-educated (62 per cent of brokers and 63 per cent sub-brokers are graduates and 32 per cent of brokers and 22 per cent sub-brokers are post-graduates), keeping in mind the low level of formal training, it can be assumed that their understanding of financial products, markets and regulations is based primarily on experience," the report says.
