If SEBI’s new norms on investment advisors come into force, mutual fund sales will decline even further and mis-selling of insurance products will increase!
When UK Sinha took over as the chairman of the Securities and Exchange Board of India (SEBI), small distributors were elated. As the head of Unit Trust of India, he had after all felt the impact of a series of harebrained decisions by SEBI under the previous regime relating to mutual funds (such as abolishing upfront commissions abruptly). Small distributors hoped that Mr Sinha would reverse the previous decision or at least make sure that distributors are incentivised in some way. He stunned them by coming out with a more harebrained idea-a small charge to first-time investors. Polite criticism pointed out a simple flaw-how do you define "first-time"? It was no surprise that SEBI had not thought about it. It usually doesn't.
SEBI under Mr Sinha has now a gone a step further which would create major headwinds for the fund industry, especially after an 22nd August circular which asks mutual funds to implement a segregation between an agent and an advisor. SEBI now wants to regulate investment advisors and that too through the completely failed concept of Self Regulatory Organisations (SROs). No matter that its grievance redressal system is not exactly pro-investor, no matter that there is no surveillance worth talking about and market manipulation is rampant, no matter that its consent order system allows crooks to get away, investment advisor regulation seems to be a priority for Sinha.
SEBI has just released a concept paper, which lays down how an SRO would be formed to regulate investment advisors who will be registered under SEBI. The crux of the regulation is: "No financial incentives/consideration would be received from any person other than (an) investor seeking advice". What does this innocuous-sounding rule mean?
First, distributors simply cannot provide advisory services for a commission; they will have to sell for a fee. This means that if one wants to earn a commission and not a fee (since investors don't want to pay fees) he would have to identify himself as an 'agent'. Unfortunately, this means getting a letter signed from an investor that he is buying the product out of his own free will and that the agent has not done any due diligence. Few investors are willing to give such letters. No distributor is asking for it, either.
Second, the only mainline investment product that comes under SEBI is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors. Is there mis-selling of mutual funds? Well, there has to be selling first! Mutual funds are struggling to add assets-SEBI's August 2009 decision has ensured that interest in mutual funds has totally waned.
In August 2009, SEBI had banned entry load for mutual fund investments. Investors were free to decide the upfront commission to be paid to the distributor/agent, based on factors like assessment of the service of the distributor. The effect has been disastrous. From the time of the ban till August 2011, there has been huge outflow of money. SEBI simply was out of touch with reality when it assumed that investors and distributors would negotiate for the service. Even the healthiest financial services don't sell by themselves. That's the lesson from all around the world. It takes a lot of hand-holding and convincing to get someone to invest in volatile products like mutual funds. Devoid of upfront commissions, the agents simply did not want to take the trouble to sell mutual funds after August 2009. Many distributors were happy to push insurance products, which earned them higher commissions.
Under the new proposal of SEBI, this would not change. This would get aggravated. While very few people would be interested in selling mutual funds for a fee, an "investment advisor" selling only insurance products does not come under the proposed Investment Advisor Regulations. Therefore why would an existing advisor pay for a certification to become an "Investment Advisor" when he is "better off" selling ULIPs (unit-linked insurance plans) as investment products?
The media is full of stories of mis-selling of insurance products. From those nearing their retirement to 80-year-olds have been sold retirement products where they would have to pay a substantial amount for annual payment across 10 years. Sadly, even if the proposal of SEBI comes into force, such cases would continue. Incidentally, the biggest mis-sellers are large banks and SEBI's regulation will not affect them one bit.
Of course, one could argue that the intermediaries would find a way to get around these rules. That is the subject of part two of this series.
After receiving comments from the IBA, the RBI will go through it and take a final call on the pre-payment charges on loans taken under floating rates by customers, RBI chief general manager and banking ombudsman (New Delhi) M Rajeshwar Rao informed media persons
New Delhi: The Reserve Bank of India (RBI) today said the Indian Banks' Association (IBA) is expected to submit comments by the end of this month on the proposal to do away with pre-payment charges on home loans, reports PTI.
"IBA is expected to submit comments on pre-payment by the end of this month," RBI chief general manager and banking ombudsman (New Delhi) M Rajeshwar Rao said here.
After receiving the comments, the RBI will go through it and take a final call on the pre-payment charges on loans taken under floating rates by customers, he said.
Earlier this month, the banking ombudsmen conference suggested banks should not impose pre-payment charges on loans with floating rate of interest.
It had said banks may also offer long-term fixed rate housing loans to customers.
The conference said lenders may address their asset liability mismatch (ALM) issues by taking recourse to the Interest Rate Swaps (IRS) market.
"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it, to borrowers and, thus, banks only substitute interest rate risk with potential credit risk," the ombudsmen had noted.
The banks will, however, be free to recover or charge appropriate pre-payment penalties in the case of fixed rate loans, it had suggested.
Meanwhile, Mr Rao pointed out that the maximum complaints received from customers were card related.
He said as much as 41% of total complaints by customers are against the public sector banks in the New Delhi region which includes Jammu & Kashmir besides Haryana.
In the region, he said the ombudsman received maximum complaints against State Bank of India followed by ICICI Bank and HDFC Bank.
The total complaints received during 2010-11 stood at 10,508 which is 13% less than in the previous fiscal (12,613).
Most complaints are received from Delhi followed by Haryana.
The Banking Ombudsman Scheme of the RBI deals with any deficiency in the services by the bank and as many as 27 services are part of the scheme.
Ajay Marwaha joins HDFC Bank from Daiwa, India, where he was managing director and head-fixed income currencies & commodities
Marwaha executive vice president and head, trading, in the treasury department. Mr Marwaha will be in charge of interbank foreign exchange and bullion desk, interest rate trading, inter-bank derivatives, institutional sales and overseas business (treasury). He will report to Ashish Parthasarthy, treasurer, HDFC Bank.
Mr Marwaha is an MBA from Jamnalal Bajaj Institute of Management Studies and holds a bachelor of engineering degree from Mumbai University. He brings to the table a rich 17-year experience of big-ticket treasury trading.
He joins HDFC Bank from Daiwa, India, where he was managing director and head-fixed income currencies & commodities (FICC). At Daiwa, Mr Marwaha was mandated to set up and manage the FICC platform in India and INR-linked FICC activities out of Singapore. He has also worked with global organisations like Standard Chartered Bank, JP Morgan Chase, Citigroup, Lehman Brothers and Nomura Securities.