RBI is to release new coins of 50 paisa, one rupee, two rupees, five rupees and ten rupee denominations
The Reserve Bank of India (RBI) will shortly put in circulation new coins of 50 paise, one rupee, two rupees, five rupees and ten rupees denominations.
The coins of these denominations shall conform to new dimensions, designs and compositions, an official release said. These coins will be legal tender as provided in the Indian Coinage Act, 1906.
However, the existing coins in these denominations shall also continue to be legal tender, Vinod Kumar, assistant general manager, RBI, Chandigarh said.
There is nothing stop an “agent” to pass back money to an “advisor”, which makes SEBI’s new idea nonsensical. If the agent and advisor sit side-by-side in two desks of the same bank, so much the worse
The Securities and Exchange Board of India (SEBI), in a view to curb mis-selling of financial products, has released a concept paper on Investment Advisor Regulations which would cover all financial advisors and wealth managers of banks as well. This would be done by creating a separate entity which will be registered under SEBI.
SEBI wants an intermediary to choose whether he wants to be an 'agent' or an 'advisor'. An agent would be able to charge a commission while a wealth advisor will charge a fixed fee. Separately, the Reserve Bank of India (RBI) is working to set up norms to regulate the advisory services by banks after the alleged multi-crore fraud at Citibank's Gurgaon branch came to light late last year. If all distributors including bank wealth managers are made to choose either to be an agent or an advisor, won't it be a better world?
Well, maybe it is an ideal world, but don't forget another possibility. Distributors would always find a way around the SEBI move.
SEBI has stunned the mutual fund industry with a concept paper under which advisors would only earn a fee from investors and won't sell any product for a commission. Earlier, SEBI had issued a circular under which an agent will be able to sell for a commission (subject to a disclaimer that he has not done any due diligence) and won't be able to advice. Consider the actual situation on the ground, a financial advisor asked, "How is an agent supposed to promote his product? Would he depend on the recommendation of the advisor?"
A smart and ethical distributor of financial products gave Moneylife the answer. He said, "I will not be a surprised if (these) so-called investment 'advisors' work closely with 'agents' wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent." Expect this to increase, SEBI's noble intentions notwithstanding.
Another advisor who requested anonymity said, "Even if the above does not happen, how are agents expected to sell their products? Without providing investment advice on how their product would fit into a portfolio, they would not be able to promote a product at all. There would be just investment advisors and their client would then have to purchase the product directly from the manufacturers."
The worst hit from the proposal would be the "under-qualified" Independent Financial Advisors (IFAs). Most practically went out of business after the ban on entry load for mutual funds. Even if they continue as agents, how would they earn a living, considering the minimal commissions that they would earn and the declining retail participation in capital markets?
SEBI is seriously implementing the concept of separating advice from execution which will create unintended consequences as described above. As mentioned earlier, on 22nd August, SEBI had released a circular for mutual funds which stated that distributors delink their customer risk, investment objective and mutual fund scheme evaluation from their sales and relationship management processes and personnel.
Along with this, see what happens if a distributor were to categorise his transactions with customers, as 'advisory' or 'execution only'. The 'advisory' transaction is where a distributor offers advice on a particular product and recommends a product which is within the risk limits of the customer. Where no advice is provided, the transaction would be categorised as 'execution only'. However, the customer would have to provide a written communication that the transaction was 'execution only'—which he has bought at his own risk and understanding. The distributor is also to make a disclosure to the customer regarding the 'conflict of interest' arising from selling of such products.
How far this has been implemented by the distributors is unknown. We know of mutual fund investors who have not been asked to sign a letter like this, by their agents. As far as written communication goes, most investors take the agents' advice prior to buying a product—therefore some would refuse to give such a letter. Or they would give the letter, but it would have no meaning.
In any case, this move cannot prevent mis-selling. Though in an advisory transaction the onus would fall on the distributor, agents would take signatures on a document claiming the transaction was 'execution only'. Customers are after all known to sign on blank forms and signing without reading.
Finally, how would larger distributors like HDFC Bank function? That remains to be seen-but they can have one desk which "advises" and another desk that "executes". It would be the same organisation-and the same mis-selling—making nonsense out of SEBI's proposed do-gooding. It is the small distributors who would be worst-hit. In fact, if SEBI is really serious about curbing mis-selling, it should have had a speedier grievance redressal system with stiff penalties. SEBI has been quite lenient in dealing with offenders as Moneylife (alone) has repeatedly pointed out.
One other issue remains—the structure of the regulations themselves. Will a Self Regulatory Organisation (SRO) work? That is subject of the third part of this series tomorrow.
You may also want to read:
Investment Advisor Regulation I: SEBI's ideas are, as usual, far from reality; may increase mis-selling!
IIFL Mutual Fund new issue closes on 12 October 2011
IIFL Mutual Fund has launched IIFL Nifty ETF, an open-ended scheme.
The investment objective of the scheme is to provide returns (before fees and expenses) that closely correspond to the total return of the S&P CNX Nifty Index subject, to tracking errors.
The new issue closes on 12 October 2011. The minimum investment amount is Rs5000. Manish Bandi is the fund manager of the Scheme.