With their friendly user interfaces and easy transactions, online platforms for investing in direct plans of mutual funds have been a big hit with young investors bringing in nearly a third of incremental flows into funds. But such platforms have been operating in a regulatory vacuum. Though operators are registered under SEBI’s Investment Advisor or Stock Broker regulations, they adhere to these regulations only loosely and offer their services to the public at large.
Investors have no recourse to a grievance redressal mechanism. With these platforms offering services for free, there’s a cloud over their revenue model too, with concerns about customer data monetisation, use of float money and backdoor incentives from fund houses. The Securities Exchange Board of India (SEBI)’s new circular on mutual fund execution-only platforms or EOPs, is aimed at setting basic ground rules for this business. SEBI has sought to regulate EOPs indirectly, through the medium of stock exchanges or the mutual fund industry body. From September 1, registration with SEBI or Association of Mutual Funds of India (AMFI) will be compulsory for EOPs, except in cases where they offer services ‘only’ to their clients.
SEBI has allowed two categories of EOPs — Category 1 who act as agents of mutual funds and Category 2 who act as agents of investors with trading membership of a stock exchange. Category 2 EOPs are required to meet fit and proper criteria and net worth norms applicable to stock brokers, while AMFI will set eligibility criteria and obligations for Category 1 EOPs. SEBI has allowed EOPs to charge a flat fee, with AMCs and investors bearing the cost for Category 1 and 2 respectively. It is good that this will be a flat fee and not a transaction-based one that could have pushed up expense ratios.To avoid conflicts of interest, the platforms are not allowed to display ads or recommend any schemes. While the attempt to bring in regulatory boundaries for EOPs is welcome, the above framework seems to have some loose ends.
Investors, for one, may have trouble distinguishing and choosing between platforms offered by RIAs/brokers to clients and Category 1 and Category 2 EOPs. The fact that the EOP framework applies only to platforms offering services to ‘non-clients’ creates a loophole, as operators may be able to claim that all their users are their ‘clients’. It is also moot if the stock exchanges or AMFI will manage to effectively oversee the operations of EOPs or enforce regulations on data protection et al. Going by the many instances of brokers misusing client funds, Indian stock exchanges have proved to be very poor first-line regulators. AMFI has taken on a very limited regulatory role so far. Therefore, it remains to be seen if this attempt at light-touch regulation by SEBI makes for a better investor experience with EOPs.