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Need to Do More

Sebi investment advisor guidelines are a necessary first step but inadequate

After suggesting a no-load option for direct mutual fund (MF) applications, the Securities and Exchange Board of India (Sebi) issued a draft set of guidelines, in October, to govern investment advisors (IA). Mis-selling of financial products happens globally, but on account of a lack of the last mile guidelines in India, perhaps here it happens on a wider scale.

Outlook Money reader, C Rajay Kumar from Baroda and an MF investor for the past 20 years, wrote in to us saying that on a recent trip to a bank to submit his MF application form, the bank introduced him to one IA who Kumar claims knew nothing on existing schemes. Instead, she was hell-bent on “pushing” NFOs on flimsy grounds. Imagine if ill-informed advisers are present in droves in banks, what must be the quality of some 20,000 active Association of Mutual Funds of India (Amfi) qualified MF agents. Letters complaining about ill-informed advice reach us AT OUTLOOK MONEY almost daily.

The start…
Investors like these may have a ray of hope as Sebi has set on a long and tiring, yet important, journey of regulating investment advisors. For starters, it has defined an IA as someone who is engaged in the business of advising others on securities, either directly or through publications, writings, emails in return of a consideration, either cash or non-cash.

Media has been excluded, so any advice that you read in these pages or even on TV channels would be exempted. IAs should also disclose all the commissions and rewards that they will receive for selling a product. They should be a part of a Self-Regulatory Organisation (SRO) and can practice only if the IA has a certificate of registration that can be procured after applying to Sebi.

…is not enough
Although the guideline is just a first step, they are clearly insufficient and inadequate to efficiently govern agents. Like Sebi has exempted advice that appears in the media but falls short of differentiating people who dole them out – in-house or outside experts.

Does that mean that the scores of analysts we see on TV channels, recommending stocks, will be exempt? In 2006, Sebi had pulled up a technical analyst for giving recommendations that were inconsistent to his personal trading pattern. Currently, Sebi’s draft regulations might be misinterpreted and give a back-door entry to such unscrupulous analysts who might hide behind the garb of passing recommendations through the media.

Multiple products and regulators
The second issue is that of an SRO. Although the investment advisor is supposed to register under an SRO, currently there are no SROs in India, except the Bombay stock exchange and the national stock exchange. So, except stock brokers, no other form of investment advisors today - those that recommend other investment avenues like MFs, insurance, deposits, etc., make the cut. The Financial Planning Standards Board (FPSB) – the governing body of Certified Financial Planners – submitted its application to become an SRO a few weeks back. But non-CFP agents do not come under FPSB. Amongst these, the ones that sell MFs are registered with AMFI. But AMFI is merely a trade body - an association of MFs, it does not have the wherewithal to govern MFs or their agents. So, which SRO will govern them?

Further, although IAs employed in banks are required to AMFI and IRDA compliant when selling MFs and insurance, respectively; banks are regulated by the Reserve Bank of India.

Finally, who will govern insurance agents – currently the most notorious of the lot that lure investors to buy unit-linked insurance plans and then pocket the high commission of 30, sometimes 40 per cent as against 2.25 per cent that a MF earns them. Not only the definition of a “security” as specified under the Sebi Act - and to which the Sebi IA guidelines refer to - absolves insurance products, insurance advisors are governed by a separate regulator – Insurance Regulatory Authority of India (IRDA). Hence, Sebi IA guidelines currently do not cover insurance advisors.

Sebi would need to go back to the drawing board if it wants to walk the talk. Ultimately, all the three regulators must come together to tighten the laws and ensure that whichever product you buy from whatever type of agent, you are sold the right one.


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