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Advisors, Investors and Regulators

SEBI’s latest reforms will lead to a painful period of adjustments & change the way funds are run & invested in…

The cover story of the September issue of Mutual Fund Insight explains the impact of Sebi’s latest round of reforms on the operation of mutual funds in India. These changes are not minor and will bring about a good amount of upheaval in the way mutual funds are run and the way in which people invest in them.

Like most of what we write in this magazine, the cover story itself mostly focuses on the impact on investors caused by Sebi’s actions and the funds’ response to those actions. However, there is likely to be some impact on the business of fund advisors and distributors also. Businessmen dislike changes, and with good reason. It’s hard to plan for the future when the rules and regulations are not stable. I would hate it too if the regulations governing publishing a magazine or operating a website changed often.

Sebi’s changes that affect advisors can be divided into two groups. The first set is directly aimed at changing the advisors’ regulatory environment. The second set, though not directly aimed at the advisors and distributors, may eventually impact them; for example, the launch of direct plans of mutual funds.

In the first category, Sebi has stated that to tackle mis-selling, it would create a system for identifying the actual sales personnel of distributors, of evolving a system of standardised product labelling and will include mis-selling as a ‘fraudulent and unfair trade practice’ in its regulations. This is a significant change and distributors will have to ensure that they document what they are recommending and why they are doing so. No doubt this will add cost and friction to the business. However, mis-selling is such a potent issue that no one can seriously argue against these measures. Defining mis-selling finely enough to base a law on it is not easy and one hopes that it won’t be done without a lot of careful thought.

The potentially big change that Sebi announced was the initiation of a formal regulatory system for investment advisors. Everyone who is offering investment advice of any kind has to get registered under a new system that will be initiated. The regulations seek to clearly distinguish between those who sell products and those who offer advice. Under this, advisors can accept payment only from the clients and not from AMCs or other product creators (the advisor regulations are for all financial products regulated by Sebi, not just funds).

There are a lot of exceptions and some lack of clarity at this stage but the bottomline is that legally- recognised profession of financial advisors now comes into being. There is now a regulatory basis for the financial distributor business to bifurcate into those who are assisting sellers and those who are assisting investors. It will be a long process but I believe that this is a far-reaching move that will eventually help every stakeholder.
At the end of the day, as in any other business, those who offer some extra value to their customers will flourish. However, a painful period of adjustments is inevitable.

By the way, our next issue will be the 10th anniversary issue of Mutual Fund Insight. We are on the threshold of the second decade of our magazine’s life and no doubt, it will be, at least, as eventful as the first one. Like every year in the last decade, you can look forward to a special package that offers an all-encompassing view of where mutual fund investing is and where it’s going.