How SEBI is killing financial inclusion
Regulators are meant to sift through the bad apples and throw them out. Not destroy the industry.
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A recent survey by a global rating agency said three out of every four adult Indians are financially illiterate. Perhaps the figure is much higher. Look at any data and it tells you how badly we Indians have been saving and investing our money.
We have among the highest savings rate - that does not beat inflation - and among the lowest investment rate. And yet, investments into financial assets are growing and breaking new records almost every month. In other words, we are buying more financial products than before, but are, perhaps, at the same level of financial literacy than before.
Our aspirations are rising faster than our income. It is for this reason why more and more Indians are becoming more conscious of the need to manage their money well. They are okay with wanting to seek out good financial advice even though they may not be yet ready to pay for it.
Chances are it won't happen. Simply because, SEBI, the stock market regulator, is out to kill the financial advisory business. The regulator believes we should invest without any professional advice, least of all, from an individual adviser.SEBI has turned all business logic on its head to come to the conclusion that an industry can survive without an effective distribution chain.
Policies of the regulator have meant we have just about 40,000 registered individual financial advisers in a country of a billion people. This number was close to a lakh - miniscule in any case - a few years ago and has only been shrinking.
Even of this 40,000, the active advisers would be one-third, I am told. The number of Certified Financial Planners or CFPs has been shrinking over the years, and is just a few thousand right now.
Who is to blame?
In its spirit of protecting investors - and rightly so - SEBI started coming down hard on the mutual fund industry a few years ago. It started cutting commissions they could pay out to distributors of its products, put stringent conditions on them in terms of how they should market their products (they are not even allowed to advertise an award they win!), and were even counting every second closely of the statutory risk warning at the end of every advertisement.
While some of these measures were rather hare-brained, one cannot disagree with the fact that investors must get their financial products at the lowest cost possible. After SEBI's measures, a mutual fund became the lowest cost financial product if one were to exclude the government-owned National Pension Scheme, where the costs are so low that no one wants to sell it, and very few, as a result, have bought it.
SEBI has now gone a step forward. It seems to believe that distribution is a dirty word. It has turned all business logic on its head to come to the conclusion that an industry can survive without an effective distribution chain.
Is a distribution chain not an integral part of any industry? So, how is the mutual fund industry any different? The job of a regulator is make sure there are sound rules laid down and everyone plays by those rules. But what has SEBI done? It has been on a crusade to get everyone to buy mutual funds directly. It has said that if you buy directly from a mutual fund, you pay zero cost. Super!
Only one problem. How many of us know what really we should be buying? Is financial planning and investment about going to a few portals, picking up the best performing schemes listed on them, and go and click? And what's more, the regulator is toying with the idea of allowing shopping portals to sell mutual funds too.
What has always baffled me is why the mistrust? Is it because distributors have miss-sold financial products?
Of course they have. In fact, the maximum miss-selling has taken place at the level of banks and the larger distributors, and not the individuals. What has SEBI done about it? Has it investigated and brought to book culprits engaging in such massive fraud? Sadly, the answer is no. It investigated only one case.
In any case, it has found itself weak-kneed to take any action against banks, most of whom, have been merrily miss-selling.
A few years ago, I was part of a three-member SEBI committee to look into miss-selling. SEBI carried out a mystery shopping exercise to identify miss-selling of mutual funds. Forget about taking any action, the report was not even made public! Unfortunately, I am not at liberty to disclose the contents of the report having been a part of it.
If SEBI is so convinced that Independent Financial Advisers (IFA) are not trustworthy and are damaging investor interest, why does it not launch a thorough probe and back its decision with sound evidence?
Which industry is perfect? Regulators are meant to sift through the bad apples and throw them out. Not kill an entire industry.
The latest masterstroke by SEBI has been to hand over a Rs 100 crore-plus financial literacy budget of the mutual fund industry away from them to their association, AMFI (Association of Mutual Funs in India).
Over the past 15 years, Indian mutual funds have spent a lot of money in promoting financial literacy through various outreach programmes, both on the ground and through the media. Again, there were some bad apples who were carrying out a sham by running investor camps with three or four attendees.
Why did SEBI not penalise them? Instead, it has just taken away a large sum of money, and chances are all it will do with it is a series of advertising campaigns. Is that going to make us financially literate?
If India is to progress, its citizens need to be financially literate. We need an army of at least 10 million men and women out there who take up financial advisory as a career that is worth their while. A career that provides them a livelihood. And respect. Not one where systematically their income is cut from under their feet and they have no respect.
If there is one thing SEBI needs to do, it is this: Create a system where individuals would want to become financial advisers. Use the funds at its disposal to educate and empower the youth to become credible distributors and advisers.
Encourage investors to value advice and not fritter away their money clicking away on transaction platforms without knowing the ABCs of investing. Else, the next survey by the ratings agency will paint an even bleaker picture.