Sebi issued a discussion paper in January proposing that distributors of financial products have to decide by March whether they want to be advisors or distributors. Photo: Aniruddha Chowdhury/Mint
Sebi issued a discussion paper in January proposing that distributors of financial products have to decide by March whether they want to be advisors or distributors. Photo: Aniruddha Chowdhury/Mint

Financial services firms oppose Sebi proposal to choose between distribution, advisory

FPSB, an association of financial planners in India, has also opposed the norms in the current format, writing to Sebi that this move could prompt advisors to shut down an already unviable business

Mumbai: Wealth managers and brokerage firms have written to the capital markets regulator, protesting against its discussion paper on investment adviser norms saying it will hurt their business. 

On 2 January, the Securities and Exchange Board of India (Sebi) issued a discussion paper, which proposed that distributors of financial products have to decide by March 2019 whether they want to be advisors or distributors.

Currently, many wealth management and brokerage firms offer both services with a so-called Chinese wall separating the two businesses to prevent conflicts of interest.

“Sebi’s proposal will require massive restructuring as the proposed norms are very restrictive and will prevent even a holding company from doing advisory business if its subsidiary is distributing financial products," said a wealth manager of a large brokerage firm, who has seen the communication with the regulator. This person said that his firm would take a significant hit to revenues if it has to choose between distribution and advisory.

The Financial Planning and Stability Boards of India (FPSB), an association of financial planners in India, has also opposed the norms in the current format, writing to Sebi that this move could prompt advisors to shut down an already unviable business. 

Sebi did not answer an email sent on Tuesday.  

“The proposed norms will result in unwarranted commercial hardships to the financial services players as a large number of the diversified wealth managers currently render both advisory as well as distribution services. A wide range of Sebi norms on intermediaries recognize that conflicts are imminent in any financial services business. These conflicts have to be mitigated by way of disclosures (and) putting conflict resolution policies in place whilst acting in the best interest of the clients," said Tejesh Chitlangi, Partner at law firm IC Universal Legal.

If the Sebi conditions are read literally, then banks too will need to give up investment advisor licenses as the distribution business is too big to be shut down, said the distribution head of a retail bank, on the condition of anonymity. 

Sebi’s discussion paper had invited comments from stakeholders till 23 January.

Currently, banks are the biggest distributors of mutual fund products. Prime Database data shows that six of the 10 highest commission-earning of all distributors are banks, who earned Rs1,487 crore in 2016-17. 

“The segregation of advice from distribution already exists. Beyond a point, a hermetically sealed separation is neither possible nor desirable from an investor perspective. It would result in the advice business to virtually shut shop. It would also result in distribution without advice, as incidental advice is sought to be non-exempt from Sebi registration. In other words, Sebi will be prescribing a requirement of misselling," said Sandeep Parekh, Managing Partner, Finsec Law Advisors.

“This has been tried and its effect noted in the UK (United Kingdom), by its own regulator. Instead, Sebi should strengthen the separation of the two businesses and have a framework for regulating distribution at par with advice to reduce any arbitrage," Parekh added.

“In all the previous avatars, the Sebi discussion paper seemed to focus only on mutual fund distribution. This time, the intent is also to capture equity advice and brokerages. Many of the brokerage firms are contemplating reduced allocation or shutting the research division as it typically does not generate so much revenue and brokerage revenues remains the main stay," said the head of brokerage firm. 

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