The FAQ released by SEBI on the Registered Investment Advisor (RIA) regulations has put mutual fund distributors in a bind.
In February, SEBI has come out with a detailed FAQ on RIA in which it has stated that if an insurance agent or insurance broker expand their activities to include investment advice on other financial products, they may be registered and regulated under RIA. Similarly, pension advisers have also been asked to register themselves with SEBI to sell mutual fund schemes.
Meanwhile, SEBI has clarified that distributors have to register themselves as RIA to sell other financial products like NCD, tax free bonds etc. which are regulated by SEBI. Click here to read complete FAQ on RIA regulations.
Going by SEBI’s regulations, it appears that the regulator is nudging distributors to adopt fiduciary responsibility for their clients. A recent article published by the The Economist titled ‘Seller beware’ states that the US government has proposed a few changes to expand the scope of responsibility of financial advisers towards their clients. Currently, Australia and UK have seller beware model in which financial advisers have a fiduciary responsibility to act in the best interest of their clients. Prima facie, it looks like SEBI intends to introduce similar fiduciary obligations on distributors in India.
Cafemutual has received several calls from financial advisers seeking clarity on FAQ. In fact, a few advisers are planning to register with SEBI while others are planning to give up insurance business to avoid registering with SEBI. Majority of advisers feel they can continue with their current model.
A few financial advisers feel that RIA would not be a viable model for them. “I don’t think fee only or fee plus commission is viable for me. I would like to continue with the mutual fund distribution along with the distribution of other financial products,” said a Pune based financial adviser.
Currently, there are just over 200 RIAs in India. Lack of awareness among advisers, stringent compliance, high costs, ambiguity regarding arm’s length/Chinese wall clause etc. are among most cited reasons for this low registration. A few industry officials say that SEBI may further tighten norms for distributors in order to bring them on board.
A vast majority of RIAs continue to depend on commissions from AMCs. They have carved out a separate entity to execute transactions. Also, Cafemutual found that a few RIAs have also either empaneled or in a process of empanelling with online sub broking platforms.
Another option would be to float Insurance Marketing Firm (IMF). Recently, IRDAI has allowed distributors to sell insurance policies of two life, two general and two health insurance companies through IMF. In addition, agents can also sell other financial products like mutual funds and pension products by floating an IMF, subject to respective regulatory approval. SEBI’s FAQ has no mention on this new channel of distribution. Click here to get details about IMF.
Over the last two years, SEBI has imposed fines on a few stock brokers for charging a fee without registering themselves as RIA. However, the market regulator has not penalized any financial adviser for charging a fee as not all of them are registered with SEBI. It remains to be seen if SEBI starts penalizing distributors who have not registered as RIA and are continuing to charge fee from clients.
Going by SEBI’s regulations, it is clear that the regulator is nudging all distributors to register themselves as RIA.
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