Ashish Chauhan, Deepak Chatterjee, Dhirendra Kumar, Uma Shashikant discuss the potential role of the proposed SRO in a session moderated by Deena Mehta at a Financial Intermediaries Association of India (FIAI) event held in Mumbai recently.
Deena Mehta: You have a mutual fund platform through which you register distributors. AMFI is coming up with MF utility platform. Is there duplication of resources?
Ashish Chauhan: A fundamental question which needs to be addressed is that whose interest the SRO is protecting. Is it investors, AMCs or distributors? If AMFI creates its own platform it will come with huge additional costs. Stock exchanges already have a platform for equities, derivatives, currency. So the additional cost for us is marginal.
Deena Mehta: Exchanges give a trade guarantee. If you look at mutual fund SRO or CA association there are no such tangible deliverables. Can such an SRO gain the acceptance and trust of investors?
Uma Shashikant: The medical council does not penalize doctors if they don’t follow the code of conduct. It then becomes an organization with no regulatory teeth. The credibility of advisor who is working in the interest of investors needs to be restored. The regulator intends to restore the trust of advisors among investors. The outcome of SRO will depend on a large extent on how SRO sees itself. Whether the body sees itself as a club, a lobbying body which protects itself from the regulator which curbs its business, or an entity which stands by the investor and rebuilds the trust that has been lost. The SRO’s task is uphill and the entity should have high standards and a great vision.
Deena Mehta: AMFI too is in the fray to form an SRO. Do you see any conflict of interest there?
Deepak Chatterjee: It will help if we look at the international experience. In US, the main regulator is Securities and Exchange Commission (SEC). SEC delegated it to other entities like National Association of Securities Dealers (NASD) and New York Stock Exchange (NYSE) to regulate their members. In 2007, all entities were clubbed and Financial Industry Regulatory Authority (FINRA) was formed. You have similar examples in Canada and other geographies. You cannot have an entity which is too neutral that it is completely remote from the industry. On the other side you cannot also have an entity where there is a conflict of interest. I believe that SRO should emerge from within the distribution fraternity. The issue of conflict of interest has to be carefully addressed. SRO should know how the industry runs, preferably some entity within the distribution fraternity.
Deena Mehta: Would SRO add any further value to investors? Does it make mutual fund a better asset class just because there is an SRO?
Dhirendra Kumar: Stock exchanges are quasi-regulator who have the wherewithal to regulate its members. The stock exchange operation is mechanical in nature. It is quantitative. You can define a default, margin requirement, etc. Unlike that, selling mutual fund can has lot of soft variants. Someone who is consistently mis-selling may or may not get caught. Only fraud can be measured and penalized. It’s difficult to prove mis-selling. This is needed whether it is in the form or SRO or any other form of SEBI. It should have the intelligence. It is extremely important to define what we are trying to regulate. Regulating a tribe is very tricky. The rules should be articulated very well.
Deena Mehta: Will SRO have the infrastructure to regulate distributors?
Deepak Chatterjee: It is impossible for SEC to regulate all members; which is why it has delegated the task to FINRA. FINRA has 3500 employees and operates out of 20 offices. That kind of manpower and dedication is required. Similarly, it is impossible for SEBI to do that. It is better that SRO has decided to form SRO. The SRO has to rise to the occasion to establish its corporate governance, manpower and infrastructure.
Deena Mehta: We are inspected and audited by multiple regulators and entities. Will SEBI let go some of its functions so that SRO becomes supreme?
Ashish Chauhan: It’s a part of the evolution. SEBI is a young regulator. In the beginning there is a tendency to take control of everything. Now, FIIs will be registered by custodians. In the last one year there is a sea change about the thinking of how to regulate. Today brokers wear many hats and thus are audited by too many people. We have proposed to SEBI certain methodologies on how to audit members who face inspection from multiple regulatory agencies. Small brokers are unduly burdened with too many audits. SRO is a welcome move.
Deena Mehta: Mis-selling is a primary concern which the SRO will address. How challenging is it for the SRO to make sure that it is seen as a fair organization?
Dhirendra Kumar: This requires a lot of institutional knowledge being embedded into SRO which I am very confident that SEBI is not absorbing it. I can tell you from my experience that officers handling mutual funds keep changing in SEBI. We are seeing the market evolve radically. Having an establishment which is committed, builds knowledge, understanding which evolves from there is important. Even investors could be at fault. They can make a claim which is not right.
Deena Mehta: I would like the panel to give one suggestion to SRO…
Deepak Chatterjee: A lot of stress has to be given on technology.
Ashish Chauhan: It should have the right composition of members on the board so that there is no conflict of interest.
Dhirendra Kumar: It should have an unambiguous code of conduct. It should not have vague and motherhood statements.
Uma Shashikant: There is a lot of work which needs to be done on how the activities of these registered members will be conducted. It has to ensure that the execution of the set objectives happen. It calls for lot of thinking, resources, time and an SRO should do all this. There is a requirement of building trust. Doing a set of activities which restores this trust should be the priority. It is critical for the organization to be seen as raising the standard of advisors talking to customers.
