Over the past few weeks, there has been a raging debate among distributors of financial products over the Securities & Exchange Board of India’s (SEBI’s) proposed regulations covering investment advisors. A key element to the regulations, first issued in 2013, which is being further tightened, is that those wanting to offer investment advice will have to register as investment advisors and become accountable for their advice. Separately, distributors will have to disclose their commissions, especially trail commissions.
Who gets hurt in the process and who gains? These days, a substantial chunk of financial advice to middle-class savers comes from bank relationship managers. They have also been responsible for gross mis-selling of insurance and financial products, churning of mutual fund portfolios, portraying risky derivatives-based products as safe, tying up expensive insurance products to loans and other banking facilities and, worse, getting away with zero responsibility for losses or pathetic returns on wealth management services.
Banks are regulated by the Reserve Bank of India (RBI). Unfortunately, RBI is most reluctant to check malpractices by banks. A consumer charter that would have fixed many of these issues has been kept toothless and in limbo for the past 20 months. Instead, in April 2016, RBI issued ‘Guidelines on Investment Advisory Services offered by Banks’ which requires investment advice to be offered by a separate subsidiary registered with SEBI, that has an arms-length relationship with the bank. The catch is that banks have been given another three years to organise their businesses in accordance with these guidelines.
The timeframe can only be contracted if SEBI’s amended guidelines kick-in sooner and make it mandatory for banks to comply. Sadly, even SEBI’s proposal to tighten rules for distributors and advisors gives the former three years to fall in line. Consider how reluctant RBI is to regulate sale of financial products by banks. It took three years to convert its draft guidelines on the subject, issued on 28 June 2013, to official guidelines (not regulation) and has now offered a further three years for compliance! In contrast, SEBI issued its draft guidelines in 2012 and issued its final guidelines in early 2013.
At Moneylife, our view is that SEBI’s guidelines are a step in the right direction. Making investment advisors more accountable will certainly take away the incentive to mis-sell products for commissions, although it does burden advisors with onerous reporting and administrative work and forces investors to do some hard work too, in the process.
What does this mean for originators of financial products? Will it force mutual fund companies to engage directly with their target customers? Today, their marketing efforts comprise mass-media campaigns with a general feel-good message while the real sales come from wooing and incentivising ‘distributors/banks’ to ‘push’ products with higher incentives. Naturally, there is little motivation to cut high costs and improve returns to make the products more attractive to the saver.
Will It Cover Everybody?
By shifting the burden of selling the right financial products on to advisors, SEBI will also reduce its own role in grievance redress effort. However, one big question remains. Has SEBI, which is mandated to protect investors, ensured that its regulations cover every possible source of mis-selling? Or will it end up making business tougher and more onerous only for those who want to comply, while fraudsters and paid influencers thrive unchecked? Let’s take a look at those who will continue to remain outside SEBI’s regulatory gaze.
Paid Bloggers: Moneylife routinely receives requests from clueless ‘digital marketing’ companies, fishing for ‘content providers’ to plant articles in the media and on blogs. Here is just one example: On 10th October, Shalini from Buzzerati writes to say, “We have received a campaign request for a reputed Indian mutual funds company. They are looking for finance bloggers based out of Mumbai who will be able to attend a lunch event and be introduced to new policies and re-alignments done by the company.” She wants us to share the ‘package cost’ for “attending the event+blog post+ social media share of the same.”
We are also inundated with offers to write ‘free’ blogposts for us, obviously, because marketing agencies pay them on the basis of clicks and views.
Considering that any critical assessment of their schemes is anathema to most mutual fund companies (media houses face the brunt of it in terms of refusal of advertisements), paid blog posts will have to be positive, if not laudatory. Yet, they will appear as ‘independent’, spread across the Internet, and will be actively promoted on social media by the digital marketers who commission them. How does SEBI plan to tackle this? Will it monitor the content of such blogs or even know which ones peddle paid-praise? Will it question mutual funds that commission such content?
Quid Pro Quo Deals: Large PR firms handle another form of paid publicity. They ‘place’ and promote columns on television and arrange ostensibly independent financial experts or lawyers to appear on television programmes and discussion panels to promote their client’s point of view. This is part of a fairly open quid-pro-quo for advertising campaigns and the best of companies is fairly brazen about making these demands. Does SEBI have the ability, or the will, to catch such dubious influence-peddling?
Paid Academics, Lawyers and Consultants: Many academics, retired bureaucrats, consultants and lawyers on policy-making bodies/ boards/committees of the government have remunerative relationships with banks and corporate houses. Corporate houses use them to influence regulation and policy or, at least, ensure that their point of view is represented. Yet, none of them is ever asked to disclose his/her financial associations. Simultaneously, they work at keeping out independent voices from such agencies. Does SEBI have any plan to insist on some ground rules and disclosures for this group of influence-peddlers?
These academics and consultants not only help shape policy to suit their paymasters, but also draft regulation and legislation which is passed off as the work of the regulator/policy-making committee. I know of a couple of specific examples, where such experts ensured glaring loopholes in the rules and exploited them later for their corporate clients. One example that I had written about pertained to SEBI’s insider trading regulation. Such influence-peddling by unscrupulous academics and consultants is not an Indian phenomenon; it is a global problem that is not easily fixed because of the financial clout of giant multinational corporations.
Fraudsters and Tipsters: Finally, at the lowest end, you have fraudsters and tipsters who continue to spam our mobile phones with stock tips, completely confident that they will fly below the regulator’s radar. Yet, they manage to cheat a large swathe of gullible investors.
Does SEBI have a mechanism to track these, or at least put information in the public domain, for careful savers who like to do their homework? Yes, it does have such a platform in Sachet; but sachet.rbi.org, inaugurated with much fanfare by former governor Raghuram Rajan and SEBI chairman UK Sinha, is virtually stillborn. There is no attempt whatsoever to promote it, or to make it an active platform for engagement with savers or to collect feedback on frauds and tricks being unleashed on clueless investors.
Although SEBI has come up with a discussion paper for better regulating investment advisors, it also needs to pay attention to all the other players listed above. Otherwise, SEBI will only end up regulating those it can (independent advisors), while letting off those who are either too big and powerful, or too small, to warrant its attention. And we haven’t even discussed the humungous mis-selling in insurance which most people see as ‘investment’ so far.