Fund Watch: A meaningful conversation between the regulator and the regulated

Last week, the annual mutual fund industry summit, organised by AMFI and CII, was held in Mumbai. Among the many speakers at this conference were as many as three senior functionaries of the capital markets regulator SEBI. These were chairman CB Bhave, board member Prashant Saran, and executive director KN Vaidyanathan. After the summit, much of the media extensively covered what was seen as Mr Bhave taking the fund industry to task. Some of what appeared in the media was fair reporting and some was exaggeration. Certainly, at no point did Mr Bhave questioned the very need for a mutual fund industry, as the business pages of a major daily newspaper claimed he did.

However, unlike many such conferences which are meaningless talk-shops, there was a clear underlying narrative, a conversation between the regulator and the regulated. There was also an unambiguous question asked from the regulator-and an answer given — about whether it saw itself as having any responsibility for the development of the industry.

The following is the underlying conversation of the day, as I witnessed it. This dialogue is reconstructed from what was said formally by speakers, what was said to the media and some of what was said in semi-private conversations on the margins of this conference. I’ve connected some dots, but I believe that this is an accurate account of what was meant.

Fund Industry: Mr Regulator, you’ve abolished entry loads and thus drastically cut down commissions to distributors. Fewer and fewer financial distributors are interested in selling mutual funds. You say that if you have such a great product, then why don’t people buy it.

However, it takes money for someone to carry that message and that money is not there because of the changes you have made. Also, insurance companies are continuing to sell mutual funds under the garb of ULIPs and you have been unable to ensure a level-playing field.

SEBI: Mr Fund Industry, you have to rethink your business and how you are solving your customers’ problems. You’ve allowed distributors to take over the business and become out of touch with investors and their goals. The structure of the incentives that fund companies and distributors get have to be aligned with the interest of the investors. This is the goal of the regulatory changes and also the lesson of the global financial crisis. And as far as ULIPs go, that’s the law of the land now and the chapter is closed.

Fund Industry: Mr Regulator, one of the stated goals of the IRDA is the development of the insurance industry. Don’t you have a corresponding role?

SEBI: No, we don’t. Our task is investor protection, period. For everyone who has anything to do with mutual funds, whether professionally or as an investor, this dialogue that went on has cleared the air and shown everyone where things are, and where they are headed.

Dhirendra Kumar, CEO, Value Research