Expert advice

Feb 02, 2013,13.53 IST

In the interest of investors: Must Read

Investor protection and guarding investor interest have become the buzzwords globally – especially after the crisis of 2008, which affected almost everyone.  That is a laudable objective given the fact that, mostly, the investors are at the receiving end – be it an insurance contract, a home-loan contract, home sale agreement etc., where the party of the first part completely dictates what the investor has to accept. There is virtually nothing that the investor can do. It is a take-it-or-leave-it kind of contract. There is huge asymmetry with regard to the power that these companies are exercising. Is this in the interest of the investors/ consumers? It may not be.

But nothing has changed and one sided contracts favouring the companies, banks  and other entities  to the detriment of the individual consumer, continue. The regulations are all focused on the sales end, that too in some specific financial service areas – Mutual Fund & Insurance being the prime areas, where the companies and their  intermediaries have been put through the wringer. Should customer protection not apply equally in all areas for consumers? Well, it should. But, other areas have been just been left to operate as they have always been. Let us take a few examples.

Banks routinely abuse their trust with their customers.  They are privy to customer information and their balances. They should not be hence allowed to use this privileged information to sell products to customers. Their business is banking and there it should rest. Distribution of products should be by another distinct entity and banks should not be allowed to share privileged information of their customers with this other, sister entity.  Today, we use the specious logic that banks are allowed to distribute products, as they have wide presence and hence can help in reaching these products widely. The question that is not asked here is – Is it really good for investors? Is penetration of financial products more important than ensuring consumer is not abused? Are we not supporting abusive businesses, to the detriment of consumers?

Banks abuse their pole position in other ways. When one wants a locker for instance, the bank manager will insist on a chunky FD. When one takes a loan, an insurance policy is thrust on the customer. When a home-loan is taken, they insist that the mortgage redemption insurance is taken through them only.  So, is RBI not aware of these abusive tactics? They would certainly be aware. So, why are customer interest subservient, in some cases and preeminent in other cases? Should consumer protection not be applied equally everywhere?

There are many others… Stock Brokers keep sending alerts to clients about what & when to buy and sell. But, if SEBI is so concerned about investors that they want MF distributors to do a risk profiling and matching products suitable to their risk profile, how can stock brokers be allowed to send general purpose buy/sell advice, every few days?  Is this investment? Churning was one of the prime reasons due to which the entire barrage of regulations for the MF industry came about .  Is it fine if stock brokers facilitate and abet churning clients portfolio, for brokerage?  What about Risk profiling for their clients?  It is precisely due to such continuous churning at regular intervals, that retail investors have got the notion that stock market investing is gambling. That is the reason why retail participation is so poor in our equity markets. So, how come day-trading for retail investors is allowed at all, which is purely speculative? There are no answers – only questions.

Why is SEBI bringing in a prevention of fraud and misselling regulation only for MF distributors? This should be true for all intermediaries. 

If there is a direct route in MFs, why is there no direct route in equity? Why is SEBI not talking about a platform, that lets investors directly work with NSE/ BSE, like MF investors works with AMCs in Direct mode?

Regulators have been selective in what they want to address & have clearly failed to look comprehensively at the problems confronting the customer and protecting them. There are two other important facets that have eluded the regulators. Regulators have painted large portions of the industry as “tainted”, while the black sheep are few and good ones far outnumber them. There are already laws in place to punish the guilty. Where the regulator has failed, is in meting out effective punishment to those who abuse customers. Instead they are bringing in regulations, which is like chemotherapy – it affects the good and bad equally and causes problems for the entire industry.

They are focusing on investor education. While that is important, what really works against investors is the investor psychology. They run in packs. They get carried away by short term trends – they are currently investing in real estate & gold, after exiting elsewhere. In time, they would exit from real estate & gold to something else. They are like butterflies, flitting from flower to flower. What they need is someone to act as an anchor  & confidante. They need good quality advisors to take care of their interests. But, investors are reluctant to pay, depending instead on free advice. Facilitating good quality advice to investors is the need of the hour.

But is Investment Advisor regulation an answer to this? Especially when whole swathes have been excluded and getting registered as an Investment Advisor & complying with all the conditions will be onerous.  Time will tell.

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