Business Economics & Services team (BEST)
Streamlining Financial Sector -Biggest Stumbling Bloc are Players
At least, regulators are taking cognizance of some of the anomalies in the financial system in the country, which is a good augury. The foremost is the report that capital market regulator - SEBI- is proposing to bring down cost of investing in mutual funds. It is reliably known that the market regulator is toying with the idea of capping cost of asset under management (AUM) managed by a mutual fund to 1.5%,. Presently, mutual funds are allowed to charge upto 2.5%, which is steep as compared to existing rate prevalent in the developed markets. The advisory committee set up by SEBI has recommended that the total expense ceiling should be reduced to 1.5% of daily net assets in case of equity oriented schemes and in case of closed-ended schemes the cap should be at 1.5% with an extra 30 basis points for inflows flows from beyond tier 2 and tier 3 cities.
Another important development in the financial sector is the norms evolved by the Banking Codes and Standard Board of India (BCSBI), which has made the onus of proof on the banks to prove e-frauds, which was earlier cast on the customers. BCSBI is an autonomous institution set up by the RBI in 2008 to evolve codes and standards for banking operations in the country.
Both these developments have created consternation among mutual funds and banks. The mutual funds feel that cap in the administrative expenses will hit them badly. According to them, many mutual funds are loss making ones and with the cap on expenses, many will have to fold up their operations. But what is forgotten is the likely impact the norm will have on the retail investors, who are still shying away from the capital market, after they have burnt their fingers during the capital market crises that had happened at regaualr intervals. While some of the large mutual funds are seemingly hopeful of a revival of interest by the retial investors, many do not think so. The small mutual funds operators feel that with the capping of the expense, they will not be able to sell mutual fund products in tier 2 and tier 3 cities, where they have to spend more for capturing the market by gigging attractive doles to distributors.
However, retail investors are happy about the development. If the proposal is implemented, they feel that it will rein in funds from charging exorbitant expenses. Fixation of 1.5 % as the cap, thy point out is in tune with the cap prevalent in other countries. In many situations, they point out that mutual funds rake in a lot of money of the customers as expenses towards cost of management. They also want the SEBI to come out with norms for more disclosures by the mutual funds, since many of them hide the facts from customers, particularly, commissions paid to the distributors. it may be noted that high commission paid to the agent was a bone of contention in the insurance industry. For some of the schemes like unit linked insurance, the percentage of commission was high as 40%. Now, that system has been replaced and the agent has to get the commission from the customer.
Significantly, banks through their lobby organization Indian Bank Association (IBA) has voiced their concern about the BCSBI norm. They want the earlier regime should continue so that teh onus of proof of any e-frauds should lie with the customer. There is an argument is that many of the frauds are happening with the complicit understanding of the customers and they share their password with the fraudsters and once the fraud happens they try to pose as innocents. It may be noted that the new norms will be applicable only to cases where the amount involved is Rs 10,000. For amounts, higher than this, the onus is still on the customer.
It is a good augury that the government and the regulators are taking cognizance of these anomalies in the financial sector. Undoubtedly, this will shore up the confidence of the people in the system, which will have many positive spin offs.
