The proposal for Self-Regulatory Organisation (SRO) for intermediaries is a welcome first step from the regulator. But it is only the necessary step, not sufficient in itself.
The mutual fund industry in India has grown phenomenally in the past few years, especially at the retail level. More people are actively investing and much more money is pouring into the portfolios managed by fund managers.
Just in the last five years, the inflows (at a gross level) have grown significantly. For the financial year 2013-14, average monthly inflow into equity funds (a good indicator of retail money) was Rs 4,666 crore. In the past year (2018-19, until February), average monthly inflow was Rs 36,765 crore – an annualized growth rate of 51%. And this despite a mediocre year compared to the previous year (2017-18).
Such growth, while welcome for both macro and micro reasons, does raise the question of whether there are sufficient regulatory structures in place to ensure that quality of service – especially to small investors - is not compromised in pursuit of expansion. To address this question, SEBI has put forth the idea of creating a self-regulatory organization to monitor, regulate, and develop the industry for investment services intermediaries – mutual fund distributors and investment advisors.
The draft consultation paper issued in this regard reads well and if realised in this form and executed well, would have a salutary effect on how investors are advised and serviced in the country. How will that happen?
One, the very fact that there is a dedicated organisation to regulate intermediaries, means that the latter would be subject to better oversight. Presently, SEBI regulates investment advisors and a manufacturers’ body, AMFI, regulates distributors. As the industry grows, it would become increasingly untenable for SEBI to execute its oversight over RIAs in a meaningful way.
As far as AMFI goes, as a manufacturers’ body, regulating distributors is not its primary mandate anyway. So, the emergence of Self Regulatory Organisation (SRO), whose sole purpose is to regulate and manage intermediaries will immediately mean closer scrutiny of the industry that can scale with its growth.
Second, for investors, there will be a first stop destination for raising any queries and complaints. At this time, there is SEBI complaints redress system (SCORES), the SEBI portal for handling investor issues – but it is a broad setup that works inefficiently, especially when it comes to mutual fund advisory issues.
An issue lodged by a mutual fund investor with SCORES often takes days, if not weeks, to reach resolution as it makes it way through SEBI, AMFI, mutual fund companies, and if needed, the intermediary. With an SRO in place, issues raised about an intermediary would get a single window resolution.
Third, an SRO is essentially an organization of entities who regulate themselves (putting the ‘self’ in self-regulatory) by evolving rules, code of conduct, penalties, and such. Having a healthy industry is in the interests of everyone who is part of the SRO. And the bedrock of a healthy industry is happy customers. So, this SRO, by its very nature and structure, will need to look after the interests of the customers to ensure that they grow and thrive as a body of professionals.
Fourth, the SRO, just because it’s self-regulating, does not mean it does not report to anyone. It will come under the supervision of SEBI and will be answerable to them. Also, as proposed, SEBI will have a significant say in the composition of the governing board and committees of the SRO. So, from an investor’s perspective, while they can hope for stronger scrutiny and quicker issue resolutions, it does not mean that they will lose the ability to escalate in case of dissatisfaction.
For these reasons, the potential emergence of an SRO for intermediaries is good news for investors around the country. However, one should note that even with this proposal, a few things could still go wrong.
One, in the proposal, SEBI has mooted the question of whether there should be two different SROs – one for distributors and one for RIAs. In the interest of investors, one would hope that there is just one SRO, at least to begin with. At the end of the day, the nature of services provided are the same (counsel to customers) and setting up two SROs would only make it confusing for investors.
Second, it should be noted that setting up an SRO is only a necessary first step. Much lies in the execution of its functions. They would need to be proactive in terms of conducting ‘mystery shopping’ exercises to audit practices of members, and they need to be impartial in terms of how they deal with large (read bank and national distributors) and small (read individual financial advisors) members.
Third, they need to keep up with times and develop best practice guidelines for emerging technologies like robo advisory. There are lots to be learnt from the international arena in this regards – about how to make algorithms more transparent and interfaces less misleading and so on. The SRO will need to be alive to these questions and be forward looking in terms of its guidelines.
The proposal for an SRO for intermediaries is a welcome first step from the regulator. But it is only the necessary step, not sufficient in itself. A lot still depends on how the SRO is selected, constituted, and how it executes its function. For now, investors in the country have reasons to be hopeful.(The author is co-founder and COO, Fundsindia.com.)Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.