I don't know whether to laugh or to cry.

While Money Today (May 3, 2007) writes this very interesting article on how investors are cheated by an estimated Rs 10,000 crores every year by financial intermediaries, market regulator SEBI and AMFI, the mutual fund industry body, is now proposing that SEBI create an exam and certify fund managers.

According to an article in DNA Money (May 30, 2007) AMFI's position is very clear: "If you need a qualification to sell mutual funds, why not a qualification to manage funds? The person who is handling your fund is equally important. Today, anyone can be a fund manager."

That sounds so simple and so logical - and so innocent - but yet I cry. If examinations and certifications were the perfect solution in the financial business, we would have had a totally clean and ethical world.

However, all the agents and distributors mentioned in the Money Today article whose mis-selling to investors resulted in losses of crores of rupees to the investors were all certified by some body or the other. The folks misselling mutual funds were all carrying AMFI-approved badges. The folks dumping unnecessary insurance policies as described in the Money Today article were all approved by the insurance regulator, IRDA. And the brokers and investment bankers who go about their business and polish off the little faith left in the system all have their licenses, too.

And the regulators and policy-makers tell the mutual fund industry and the insurance companies: expand into rural India; take your message to the masses. First we should fix the system and make it fairer and then worry about taking it to rural India otherwise the mis-selling committed on us more educated folks in urban India will be thrust upon the less educated in rural India.

At the end of the day, we have created a financial services industry where everyone has a license for some activity or the other and many use it to enrich themselves at the cost of the investors. We have imported and improved upon the worst practices followed by many well-known financial companies in the western world. The rationale is: since they do it there, it must be okay. The framework of our financial economy and our social system is increasingly based on 'I can cheat you before you can cheat me.' And everyone has their hand in the other person's pocket.

This proposed examination for fund managers seems to me as another way out of taking any tough decisions. Giving someone a license is the easy part. Everyone wants a badge because that badge or ID card makes them somehow legitimate and get through the security lines right upto the pockets of the investors - like the terrorists who got through the airport security lines when they boarded the planes on 9/11.

Over the past five years we have created an army of regulated financial representatives who go about flashing their badge of authority and then, when something goes wrong (as the Money Today article suggests) everyone can say ‘But he has passed an exam’. And the responsibility is over. The wrong actions are justified. The mutual fund company with the aggressive sales agent (with the AMFI certificate, of course!) shrugs its shoulders and says ‘this is the industry practice.’ The insurance company with the IRDA approved agents gives that ‘but-he-passed-the-exam’ look. Therefore, they all have a right to do wrong!

A few years ago, someone asked me what would I do after I retire (or I guess if I fail the fund manager’s exam!) and I said, “I wish I could start a business school where we give the people who graduate an MBA but, then, if the graduated student ever does anything unethical, the school takes away the MBA degree!” What a wonderful idea: there won’t be too many MBAs left in the world! But the bright and honest few who remain will certainly make the world a different place – maybe with a lower stock price but certainly more ethical.

Maybe regulation and practices in the financial services would be better if the objective changed from ‘giving’ a license, to taking it away. Imagine. For 40 years we all gave our money to UTI and they totally messed up. The solution should have been to take away their license and not let them manage money ever again. Or the banks that ended up launching all those mutual funds with Can-Double and Can-Triple guaranteed schemes. Or the Morgan Stanley mutual fund that had all those long lines to apply and then changed the product and caused havoc to the savings of small investors. Or even these past few years when mutual funds were launched as some infrastructure product and ended up buying something else totally un-connected to infrastructure. And what about all the PMS products floating around? Many are high-cost products that should not be used by any investor. Shut down their businesses and take away their licenses. When the punishment is something significant, then people will follow the law. Now, there are nods and winks and the system pays some fine and moves on – to repeat the crimes, in magnified amounts.

Money Today has brought out some of the terrible truth. Other financial journalists have often referred to it (DNA, Money Life, Outlook Money, Value Research) but Money Today had the guts to write it on a cover story. Business India, when selecting their fund management house of the year had this to say: “The general consensus was that before looking at the issue of governance, it would be more prudent to short-list the funds on the basis of their performance”.

How low have we sunk? The response of a respected magazine like Business India to mis-selling is effectively “It happens, let it be.” And no action from either AMFI or SEBI to the unethical act of mis-selling. But, yes, there is time for another certification - an exam for fund managers! Should we laugh or should we cry?

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