A slew of changes in the way funds are created and sold, would come about in the next 12-18 months, asserted KN Vaidyanathan, an Executive Director of SEBI, while speaking to Moneylife in an exclusive interview. This is the first story of a series

The Securities and Exchange Board of India (SEBI) is pushing for a series of reforms over the next 12-18 months to streamline further the process of how mutual funds are created and sold. This would mean further changes in the roles of distributors—both national distributors and Independent Financial Advisors (IFAs) who are currently not regulated.

In an exclusive interview to Moneylife editor Debashis Basu, KN Vaidyanathan, an Executive Director of SEBI said, “We will first deal with the banks and national distributors and then handle the IFAs. We have already started doing certain things. We have taken the exam away from the Association of Mutual Funds in India (AMFI). It will be handled by National Institute of Securities Markets. The test will be more current. There will be a demarcation between passing the test and getting the certificate.”

When it was pointed out that with the smaller IFAs pushed to the background, banks have emerged as powerful national distributors leading to a lot of mis-selling, Mr Vaidyanathan replied: “It’s true that banks alone enjoy the trust of investors and some of them have been abusing that trust. Maybe the fund distribution will be done by a different set of banks, provided the fund companies get their product right. Instead of feeding investors 10 different funds, nothing stops a fund company from offering one fund that does asset allocation and ensures low volatility.” Indeed, as Moneylife has pointed out many times, mis-selling often starts with product design itself.

Mr Vaidyanathan is currently talking to the asset management companies as to whether mis-selling can be rooted out through an institutional process. “The key issue on the distribution side is how do you institutionalise the due diligence process. I told the funds, you can take the view that mis-selling is not mis-selling unless I am caught. That to me is low-grade. The issue is how do I build systems in an organisation which makes it institutionally difficult to mis-sell. Banks have such systems in place. When you open a new account, there are calls from the quality control departments asking questions about various service parameters—there is a verification of the on-boarding process in place. Does the mutual fund industry have this? Why not? After all, many of them have been set up by banks. This upsets me because they are making a distinction between banking and mutual funds, depending on what is on (the) balance (sheet) and what is off balance sheet.”

Based on Mr Vaidyanathan’s suggestions, funds are working on creating appropriate internal systems. SEBI is also pushing the fund industry to develop a code of ethics and stick to it.