Sebi proposal to split roles in mutual fund industry leaves leaders worried

The Securities and Exchange Board of India’s (Sebi's) renewed push to split the role of an investment advisor and distributor is causing a lot of heartburn among mutual fund honchos. “If Sebi’s proposal is implemented, the mutual fund industry is likely to lose 40 per cent of its business,” says the CEO of a fund house.

Currently, the mutual fund industry’s inflows come from three sources – 40 per cent from banks and 30 per cent each from independent financial advisors and distributors. Industry players said that collection from branches of leading players like ICICI Prudential Mutual Fund, HDFC Mutual Fund and SBI Mutual Fund would be much more.

Sebi’s latest proposal, which said ‘banks, non-banking financial companies, corporate entities, limited liability partnerships and firms providing distribution services shall not provide investment advice in financial products, either directly or through holding or subsidiary company’ would mean that banks relationship managers will not be allowed to give advice to customers on mutual funds. And this would hurt the industry quite badly. “This is the third draft of these guidelines. Clearly, more thought needs to be put into this,” said another CEO.

Sebi put out a consultation paper on Tuesday with the new proposals and sought comments from market participants by January 23.

Another proposal that is irking fund houses is the segregation that would not allow investment advisors to distribute mutual funds directly or through immediate relatives. Fund heads point out that there could be a case where one brother is an investment advisor whereas another a distributor. “How can a person just shut down the business because his brother is an investment advisor, or vice versa. This is the third proposal from the market regulator. Clearly more thought needs to be put into this,” said a fund manager.

An important fallout of this proposal, if implemented, would be that insurance products will be mis-sold more. “Though relationship managers won’t be able to sell mutual funds, they can still continue to advice customers on insurance and other products. Anyway, insurance products have been mis-sold because of higher margins for the bank and more commission for the relationship manager. Now it will be no holds barred for them,” added the CEO.