MUMBAI: Distribution of mutual fund products and investment advice are separate activities. Sadly, regulation has been a bit of a sideshow, allowing scope for mis-selling, which Sebi now wants to crack down on.
Dusting off its old play book, the capital markets regulator on Thursday appeared firm on segregating distribution and advisory services, as it leads to conflict of interest.
This means distributors can only explain product features, but to give investment advice, they should float another company. Those giving investment advice should inform customers about receivable commission from associates or subsidiaries, as such disclosures ensure the principle of ‘appropriateness’.
“It was felt that there is a need to prevent conflict of interest between advising for investing in financial products and selling of financial products,” said Ajay Tyagi, chairman, Sebi. The conflict of interest arises due to higher commissions on select products like closed-ended mutual funds or equity funds than say, debt or open-ended funds that carry low-risk. Target-chasing employees may push schemes with more commission, downplaying risks.
As per Sebi’s consultation paper — now put up for public comments — from April 1, 2019, distributors, including their immediate relatives, subsidiary or associate entity, shall offer either investment advice or distribution services.
Existing registered investment advisers offering distribution services through a separate division can choose between providing investment advice and distribution before March 31, 2019.
The move is timely as households are opening up to mutual funds to park rainy-day funds, which usually find their way into fixed deposits or small savings schemes. A staggering 95 per cent of households invest in fixed deposits, compared to 9.7 per cent in mutual funds.
Falling interest rates and rising awareness about alternate investment tools are attracting the salaried class towards mutual funds. Currently, there are over 42 fund houses selling 2,000 schemes and managing over `21 lakh crore in assets (largely institutional investors).