7th November 2011

Reproduced below is IFA Galaxy's response to SEBI :

SEBI

Mumbai

Dear Sir

Sub : Comments on the Concept Paper on Regulation of Investment Advisors

The Securities and Exchange Board of India has floated a Concept Paper on Regulation of Investment Advisors recently and had called for Comments from Public and Other Interested Parties. In this regard, we are pleased to place the comments of IFA Galaxy before SEBI for their consideration:

A. About IFA Galaxy

IFA GALAXY is a group of Independent Financial Advisors having online membership across India. This was started two years ago in Chennai and from about 20 IFAs from Chennai, it has now grown to a group of over 10,000 IFA's across India.

The Objective and Motto of IFA Galaxy is "Knowledge Sharing". It has been conducting regular Knowledge Summits at various places addressed by renowned Speakers covering variety of topics from time to time for the purpose of enhancing the knowledge of IFAs. As a part of its knowledge sharing, IFA Galaxy has been regularly disseminating information that is of importance to the IFA community through its emails. The website of IFA Galaxy www.ifagalaxy.com is very popular among the IFA Community across the country

B. Our Comments on some of the points in the Concept Paper

1. Conflict of Interest

The note paints the whole community of distributors both individuals / organisations as unscrupulous entities. This is inferred by the comments in the note such as "distributors are loyal to only themselves. They would happily churn investors' portfolio and also squeeze more commissions from the manufacturer", "distributors are likely to be partial to, and sell more products of the manufacturer who is the best paymaster....."

As in any other sphere of activity, there are bound to be black sheep amongst distributors as well. However we believe that it is incorrect to draft regulatory guidelines, based on the actions of a few, that negatively impact the industry as a whole. Instead steps could be taken to weed out the black sheep by way of stringent action as and when complaints arise and are proven to be correct.

The Concept Paper assumes that the dual role played by the Mutual Fund Distributor (who has been called as "Agents" or "Advisors", often interchangeably) gives rise to a conflict of interest. We believe that this is not the case. The roles and responsibilities are completely different and hence this does not provide any scope for the conflict of interest. The role played by them is in the nature of an Advisor to the Clients, where as they are the Agents of the Mutual Funds

It may not be out of place to mention that every Industry has conflict of interest. For example a Doctor recommends a particular drug manufactured by a particular company although the same kind of drug is manufactured by another company with the same formulation and lower price. The Doctor is in allegiance with whom the patient or the manufacturer who supplies the drug? We have taken this example because the doctor protects the health of his patients the distributor/advisor/agent takes care of his client's financial health

2. Dual Role

The model of advisor CUM agent is by and large working well and there is no need to make it advisor OR agent. The investor today has a choice to complete his investment in mutual funds directly with the fund house concerned or through an AMFI registered intermediary. It is the investor who exercises that choice. When the investor chooses to deal with a particular intermediary, it demonstrates his trust in that intermediary. If he trusts the intermediary to provide him the right advice would he not trust the same intermediary to execute the transaction as well? In today's world where the investor seeks convenience and would like to complete his investments under one roof, SEBI's proposal to bifurcate the advisory and agency role can cause serious inconvenience to the investor. It will also have additional cost implications to the investor.

SEBI can instead allow the investor to make a choice and as a safeguard require the investor to sign an explicit declaration to the effect that while he is aware that the advisor cannot compel him to execute the transaction through him (advisor), the investor specifically chooses to transact through the advisor.

The role of an Agent and the Advisor could never be segregated in the context of the Indian Investment Scenario. If the Advisor merely provides advice to the Investor, and leaves out the execution part, this will force the Investor to look out for another person, who is an Agent, to fulfill his transaction requirements. Instead of completing his transactions in one go, the Investor is forced to go to 2 different institutions / entities for a single transaction. This is certainly not an Investor Friendly move.

3. Low level of Financial Literacy

In the Concept paper it has been time and again mentioned that in India the level of literacy are low and financial literacy are even lower. That being the case to mimic or imitate model from UK's FSA model is totally irrelevant. In an advanced country like the UK where the level of literacy and financial literacy is quite high these kinds of models are being brought only now so why such a hurry here? We at IFA Galaxy believe that such models have to be tried only after achieving full financial literacy. More thrust has to be given to Financial Literacy among the investing public.

4. Need for a Centralized Financial Investments Regulator and stoppage of Piecemeal regulation

Today we have a multitude of agencies that are regulating various parts of the Financial Investment Industry. This leads to disparity in the level of disclosures and service standards, which is certainly not in the best interest of the Investors. Hence we believe that it would be better to have a single Financial Investments Regulator, who will oversee the regulation of All Investment Products including Equities (Stock Brokers and Portfolio Management Services), Mutual Funds, Insurance, Banking, Post Office Small Savings, New Pension Scheme, Etc

Also we feel that there have been several changes in the Mutual Fund Industry space in the last 2 years happening too soon, one after the other. It would be beneficial to have a full review of the regulatory requirements and draft a complete list of changes required. They could then be implemented in a phased manner over a period of time

5. Setting up of an SRO

Setting up a Self Regulatory Organisation (SRO), we believe is a move in the right direction. A strong regulatory mechanism will eliminate the various deficiencies in the functioning of the Investment Advisory Industry.

6. Qualification for Registration of Advisor and their various responsibilities

While we welcome the need for a minimum qualification, we feel that this should not be restricted to a CA or an MBA (Finance). A graduate with adequate experience should also be considered for registration as an Advisor

Also the minimum capital adequacy should be kept at a reasonable level. The need to preserve documents for 5 years and voice recording is very expensive and will lead to cost increases for the Advisor. This will in turn make their services expensive to the Investors, which is an unintended difficulty for the Investors

C. Details of Responses received for the Questions posted on our website, from the IFAs across the country

IFA Galaxy had put out a few Questions on its website, calling for response from IFAs all over the Country. The details of questions and the responses received from the IFAs are attached

D. Conclusions:

1. We believe that it is premature in a country like India to introduce these regulations.

2. It may not be practical to segregate the responsibilities of an Advisor and Agent, given the state of Financial Literacy levels. Duality should continue.

3. Kindly evaluate the regulations in one go and formulate the plans for long term. And should avoid piece meal regulation. However they could be implemented in a phased manner over a period of time

4. It would be better to have a single Financial Investments Regulator, who will oversee the regulation of All Investment Products including Equities (Stock Brokers and Portfolio Management Services), Mutual Funds, Insurance, Banking, Post Office Small Savings, New Pension Scheme, Etc.

We are happy to place the above comments for your kind consideration. We are eager to have continuous interactions with SEBI on this subject, both in person and through e mails / letters.

Thank you

Yours Sincerely

For IFA Galaxy

Ramesh Bhat K

President

Responses to IFA Galaxy's questionnaire :

Your thoughts....

Do you agree with IFA Galaxy's views? Should duality of role be accepted as a reality? Do you think SEBI will accept duality of roles? Should a time frame of 3-5 years be sought if SEBI is unwilling to accept duality of roles? Post your comments in the box below - its YOUR forum !