Financial advisors' body moves Sebi over ban on distributors

Distributors say prohibiting IFAs from making advise will hurt retail investors most

The Foundation of Independent Financial Advisors (FIFA) has written to the Securities and Exchange Board of India’s (Sebi’s) mutual fund advisory committee seeking a hearing on a consultation paper issued by Sebi that effectively quashes any possibility of distributors providing advice to their clients.

The industry body says such a move could make it difficult for retail investors to access any advice. “We have seen a precedence of this happening in the UK. After the UK regulator - Financial Services Authority (FSA) - banned commissions for distributors serving retail clients to curb mis-selling, nobody is willing to offer advice to them. In India, if distributors are no longer allowed to give advice, it is unlikely that larger entities are going to find it viable to give advice on small-ticket investments," said FIFA chairman Dhruv Mehta. 

Mehta admits that there are instances of mis-selling in the industry, which cannot be ignored, but cautions putting a blanket ban on Independent Financial Advisors (IFAs) from giving advice to their clients is not an appropriate response. 

"There were still possibilities for individual distributors to carry on with their work without much disruption after the earlier consultation paper. But, the latest one forces individuals or entities to make a clear choice between distribution and advice," Mehta added.

Sebi's latest consultation paper expands the ambit of the proposed regulations from an individual to his relatives. It states that the immediate relatives of any distributor, including his spouse, parent, child, sister or brother cannot offer any advice. 

While the earlier consultation paper said entities offering distribution services could offer advisory through separate subsidiary, the latest paper that appeared in January - third on the issue - said entities that offer distribution service could not give advice in any mode or form.

According to the proposed regulation, banks, NBFCs, body corporates, LLPs and firms, who are willing to get registered as investment advisers, shall not provide any distribution services in financial products, either directly or through their holding company, associate company or subsidiary. It also means individual distributors, who have already registered two separate LLPs for distribution and advice, would need to rework their business models.  

Distributors say some of the latest proposals may not a feasible.  

"When a client comes to us for buying a mutual fund scheme, it is natural for him to ask us which fund would suit his requirement," said a top official of a domestic brokerage that also distributes mutual funds. Interestingly, this brokerage house has presented itself as a financial advisory in its recent marketing campaign.

Industry insiders say individual distributors will find the proposed regulatory environment more challenging than the fund houses. "Bank-backed AMCs, which also run a distribution business, could give advice under the veil of ranking from third-party service providers," said top official of a firm that provides such a service. 

"While the proposed regulations aim to remove any conflict of interest that any industry participant might be having, retail investors could be left in the lurch if IFAs are prohibited from advising. At a time when retail participation in mutual fund is seeing improvement, IFAs are needed to hand-hold small investors, especially if they are first-time investors. Awareness is just picking up and Sebi should encourage IFAs to increase retail investor participation from various parts of India," AK Narayan, former president of IFA Galaxy, a Chennai-based IFA association, said.

Last fiscal, the number of retail folios grew 28 per cent to 67 million. However, the penetration of mutual funds in India still remains low with assets-to-GDP ratio still at 12 per cent versus global average of 55 per cent. While India's MF industry has lot of ground to cover, the industry's IFA tally stood at just 77,525 as on September 2017, translating into just one advisor for every 1,000 clients.

Industry insiders say Sebi's the proposal on separating distribution and advisory is unlikely to get implemented before this fiscal as they are facing resistance.