A three-year-old RBI deadline for banks to separate their distribution and advisory businesses got over on April 20, with the changes from it having implications for how banks sell financial products to customers and advise them.
The Reserve Bank of India’s decision was inspired from the SEBI (Investment Advisers) Regulations 2013, which were revised twice later, but haven’t been put into effect yet by the securities regulator.
As a result of the change, Moneycontrol has learnt that while some banks have transferred their registered investment advisory (RIA) business to other subsidiaries, several others have surrendered their licences, choosing to remain pure-play distributors.
These include Kotak Mahindra Bank, India’s seventh-largest mutual-fund distributor, which transferred its investment advisory to a separate arm, the bank’s Chief Communication Officer Rohit Rao confirmed to Moneycontrol.
While a source said that HDFC Bank, the country’s second-largest distributor has surrendered the licence of its advisory business, and transferred its customers and relationships to an already-existing advisory arm under HDFC Securities.
Among others, Standard Chartered and HSBC decided to surrender their RIA licences, senior banking officials told Moneycontrol. Both banks did not respond to an official email from Moneycontrol seeking comment.
ICICI Bank and SBI too did not respond to our communication, even as another source said ICICI will likely surrender its licence as well, given that it already has an RIA licence under its securities’ business.
What the change means for investors
The regulators felt the need to create an arm’s length distance between distribution and advisory to help prevent misselling and eliminate conflicts of interests.
The decision will “ensure there will be arm’s length distance between the distribution of investment products and advisory services from the bank,” says Harshvardhan Roongta, Principal Financial Planner at Roongta Securities.
Distributors at banks, which earn a commission every time a financial product is sold, would typically push investment products if they see a large bank balance in a customer’s bank accounts.
Such a sales pitch cannot be equated to investment advice, as SEBI’s registered investment advisors are required to conduct a detailed risk profile of their customers, maintained records and ensure the product’s suitability for the investor based on their risk appetite and needs.
This means that distributors, who were earlier allowed to offer incidental advice and still continue to be classified as mutual fund distributors, will no longer be allowed to give any advice. And if they offer incidental advice, they ought to register with Sebi as investment advisors.
A reading of SEBI’s guidelines to shows that it intends MF distributors to just stick to explaining the product and “ensure product appropriateness,” says Suresh Sadagopan, Founder of Ladder7 Financial Advisories.
Will the move help?
“It’s a much-delayed action as SEBI’s original paper had come out in 2013. A three-year deadline by the RBI was not necessary but it’s better late than never,” says Rohit Shah, founder and CEO of Mumbai-based financial advisory firm Getting You Rich.
“Now, the compliance from banks advisory division will be carried out in a better way since it will be audited by Sebi at regular intervals in a year,” Roongta says.
Further, "Bank’s advisory arm will now not have free access to the customer’s account balance (due to arm’s length distance), thus bringing them at par with other advisors or distributors," adds Amol Joshi, founder of financial advisory firm Plan Rupee Investment Services.
However, Sadagopan is sceptical that the change will bring any benefits for the investor. “Customers seldom opt for paid advisory from these banks. So, forming a separate subsidiary for investment advisory from banks does not change much for the investor.”
Irrespective of whether you opt for only distribution services or also advisory, investors should ask distributors why they are being recommended a product.
While distributors may not do a detailed risk profiling and holistic financial planning unlike a registered investment advisor, they must undertake basic risk profiling. It is necessary that you buy an investment product that suits your needs. And be wary of a product that a banker may be selling to meet their annual sales targets.