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Money Guru | Self-regulation for wealth managers as of now

Money Guru | Self-regulation for wealth managers as of now
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First Published: Sun, Aug 07 2011. 08 49 PM IST
Updated: Sun, Aug 07 2011. 08 49 PM IST
Evolution of the wealth management industry from product selling to advising has happened at a very fast pace, but regulations have lagged. Why has regulation been so slow?
In this respect, we have recommended establishing a self regulating organization or SRO to the Swaroop committee. This can be set up under the Securities and Exchange Board of India (Sebi) and co-opted by all regulators. This document contains investment advisory guidelines, but is still pending action. Currently, we have a good product manufacturing system and a good quality check mechanism, but distribution to the final user remains unregulated. Each product is distinct in its own way and growth has happened faster than anticipated. Now elevated to the level of an advisor, the distributor community is blind spot, but remains unregulated. Why hasn’t regulation come into place yet? Maybe because there is a need for convergence of regulations and not regulators. Also, there is a debate on whether the regulations should be principles-based or rules-based.
An SRO puts the onus on the service provider to ensure that work is conducted within the prescribed framework. If they don’t follow these rules what is the penalty?
Good regulations do not get into the functioning of the business. But there are areas that need to be looked at carefully. Regulations need to have certain principles and rules, which need to be followed. An SRO set-up is really an extension of a business line. How the SRO will conduct itself is a premature question. But yes there should be penalty for indulgence in prohibited activities. Finally, the consumer has to benefit and the framework has to be ethical.
Self-regulation gives much more leeway as compared with an independent regulatory body. Is that why the industry prefers it?
In the long run, establishment of a regulator by virtue of legislation is a must. Advice is serious business and regulation needs to be co-opted. We are talking about a situation where multiple products have been introduced too fast, so mid- to long-term SRO is a good idea. Within the suggested guidelines, there is one point about board representation by the regulator, this becomes a de facto check and balance mechanism. This kind of regulation has its advantages—there will be a professional on the company board who will serve the industry and cost is also lower as it is self-funded.
Recently the Reserve Bank of India (RBI) sent a questionnaire to banks. Was it linked to the need for regulation?
From what I have read in the media, the RBI questionnaire talks of facts. It certainly helps to create a framework for regulation by establishing a contemporary picture of the industry. There is always a threshold level after which regulations need to be established.
Are there any international best practices that we can adhere to or learn from?
In the SRO model we have submitted, we have looked at best practices from countries, including New Zealand, Australia, Hong Kong and the US. India has a good opportunity to pick up the best. How these will be picked up and applied, whether through an SRO or independent body is to be seen.
Coming to some recent regulation, what is your opinion on the flat Rs 100 fee introduced by Sebi for distributors?
In a marketplace there are two kinds of intermediaries—distributors and certified financial planners (CFPs). We expect CFPs to continue to command fees as they represent consumers who are willing to pay for advice. Distributors are essentially the agents of the principal (AMCs) whom they represent and work for.
Notwithstanding the fact that CFPs could be distributors as well, this step certainly distinguishes the two categories of services and also creates a suitable space to co exist.
Ranjeet S Mudholkar is vice-chairman and CEO, Financial Planning Standards Board India.
lisa.b1@livemint.com
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First Published: Sun, Aug 07 2011. 08 49 PM IST