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Fragmented Regulations

The huge fault-line in the way consumer financial services are being regulated almost promotes mis-selling…

The message from SEBI is clear–distributor regulation is on its way. Based on what has been said in various fora, the rough shape and direction of these regulations is at least visible, if not clear. SEBI Chairman U.K. Sinha practically said as much during the annual Mutual Fund summit in Mumbai last month. There are many possibilities but it does seem likely that henceforth, mutual fund distributors will have to clearly align their interests either with the AMCs, or with investors. They’ll also probably have to record and be able to justify the advice that they are giving to investors. Whatever be the nature of the new regulations, the business of selling mutual fund is set to change, yet again.

Fortunately, the change this time is unlikely to involve any reduction in the fee earned by distributors. Whatever else has happened during the last two years since the abolition of entry loads, there is widespread recognition of the fact that the abolition of entry loads had an unintended consequence– reduced access to mutual funds by new and smaller investors. Hopefully, things will evolve in such a way that this trend can be reversed.

However, no matter how well SEBI fixes mutual fund distribution regulation, a compartmentalized approach to financial regulation is unlikely to deliver what the customer needs. This was underscored just last week when the draft report of the ‘Committee to Review Implementation of Informal Sector Pension (CRIISP)’, was put up on the PFRDA website, inviting comments. While there’s much to ponder in that report, the headline feature has been the recommendation that NPS distribution should earn a commission of 0.5 per cent of the amount invested. Remarkably, the CRIISP report explicitly points out (in para 4.11) the drop in mutual fund investments as one of the factors it took into account.

I don’t know about you, but this seems to me to be evidence of huge fault-line in the way consumer financial services are being regulated in India. On the one hand, the centrepiece of SEBI’s mutual fund regulation over the last few years has been the abolition of entry loads. Simultaneously, the PFRDA is on its way to reversing its own no-commissions policy by effectively branding SEBI’s action as a failure.

The normal argument is to say that these are different products, but that’s bunkum. From the customer’s point of view, an equity mutual fund and an NPS Tier II deposit are very similar products. Not just that, even ULIPs are very much in the same basket. More importantly, these products are being sold by the same entities to satisfy similar investor needs. And yet, the government effectively says that selling a mutual fund is worth no commission, selling NPS is worth 0.5 per cent commission and selling ULIPs is worth many times that number.

What are the chances that we, the consumers of financial services, will be sold the right product by financial intermediaries, instead of the most profitable product? There’s no point blaming this or that intermediary or agent for mis-selling. Mis-selling is baked into the very structure of our financial regulations. We have in this country, these four separate empires of financial regulations, SEBI, IRDA, the Reserve Bank and now PFRDA. Unfortunately, the four are separate only in the books of law. Actually, they rule over the same landscape, and have the same population as their subject.