Sebi to alter investment advisory norms for mutual fund distributors

Distributors fear proposed changes could hamper fund flow from small towns, cities

The Securities and Exchange Board of India (Sebi) may go ahead with tweaking its investment advisory guidelines for mutual fund (MF) distributors, even as it faces opposition from the latter.

In June, the markets regulator had proposed changes to the Sebi (Investment Advisers) Regulations, 2013, to prevent conflict of interest between “advising” and “selling” of investment products by the same entity or person.

As part of its proposals, an entity offering investment advisory services shall not be permitted to offer distribution/execution services. Banks, non-banking financial companies, and corporate bodies have to form separate subsidiaries to offer advisory services. 

Sebi had proposed to scrap the practice of using “independent financial advisors” by distributors. Instead, they would be called “mutual fund distributors” or MFDs, and will not be allowed to offer any investment advice or financial planning services. MFDs registering as investment advisors shall be allowed to receive trail commission for the products already distributed but will not be allowed to sell/distribute any product. Agencies/entities providing a ranking of MF schemes shall be required to register under the SEBI (Research Analysts) Regulations, 2014.

Distributors believe the proposed move could increase mis-selling of MF products. “If distributors are not permitted to provide investment advice as an activity associated with their distribution function, they may sell products without a check on the investor’s risk profile and product suitability,” United Forum, a forum of national and regional associations of distributors and independent financial advisors, had stated in its feedback to Sebi’s proposal in July.

The move will create an unequal playing field between individual and institutional distributors. “While banks and corporate houses will easily be able to segregate advisory and execution, individual advisors who provide a composite service may not be able to do so,” said a sector official.

According to United Forum, converting a sole proprietorship into two firms will enhance conflict, reduce accountability and minimise financial restitution in the event the investor sues the distributor. Distributors believe the proposed changes will hamper the penetration of MFs in smaller cities. One of every Rs 4 invested by individual investors in MF schemes now comes from B15 cities. 

At June-end, 26.2 per cent or Rs 2.5 lakh crore of individual assets came from B15 regions. A year before, it was Rs 1.6 lakh crore and made up 23.8 per cent of the total individual assets.

Notably, Sebi’s International Advisory Board had, in January, suggested that commission-based, as well as a fee-based approach to investment advisory, could co-exist for the time being and that the transition from commission to a fee-based approach had to be gradual.

What the new norms propose: 

• Banks, NBFCs and corporates to form separate subsidiaries to offer advisory services
• MF distributors will not be allowed to offer investment advice; advisers cannot sell investment products
• Net worth requirement for corporates to be reduced to Rs 10 lakh from Rs 25 lakh
• Application fees for corporates for initial 5 years to be reduced to Rs 10,000 from Rs 25,000 
• Registration fees to be reduced to RS 1 lakh from Rs 5 lakh