Regulatory Body Focuses on Simplification, Maintains Status Quo on TER
In a recent statement, Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey confirmed that there are no immediate plans to review the Total Expense Ratio (TER) of mutual funds. This comes more than two years after Sebi had initiated discussions around rationalising the TER, a topic that had generated significant responses from the mutual fund industry. Pandey’s remarks underline Sebi’s approach of maintaining ‘status quo’ on the matter, even as the regulator works towards simplifying a broader set of financial regulations with an emphasis on ‘optimum regulation’.
Highlights:
Sebi Chairman confirms no immediate plans to review the TER.
Focus remains on simplifying regulations for optimum regulation.
TER issue has been a contentious one for the mutual fund industry.
Sebi’s Approach to TER and Simplification of Regulations
Tuhin Kanta Pandey addressed the matter of the TER review during an event, stating that while the upper cap on TER remains in place, the actual fees charged to investors could be significantly lower. He emphasized Sebi’s commitment to simplifying regulations, which should contribute to a more effective and balanced regulatory framework, benefiting both investors and financial institutions. This simplification process aligns with Sebi’s broader goals of reducing unnecessary complexity and enhancing transparency in the market.
Pandey’s comments also reflected the regulator’s ongoing efforts to streamline rules and regulations across various segments of the financial market. Despite the long-standing discussions on TER rationalisation, Pandey made it clear that the matter would not be revisited unless there was a substantial change in the market environment.
Highlights:
Upper cap on TER remains in place; however, actual fees may be lower.
Sebi is prioritising simplification of regulations for a more balanced framework.
No immediate plans for revisiting the TER discussion unless market conditions change.
TER: A Sensitive Topic for Mutual Fund Industry
The Total Expense Ratio (TER), a key metric in the mutual fund industry, measures the operational costs of running a fund, expressed as a percentage of assets under management (AUM). A higher TER implies a larger portion of investor funds is directed towards fund management costs, which has been a point of concern for many mutual fund houses.
The issue gained traction in 2022 when Sebi initiated an internal study to evaluate the appropriateness of the TER cap and review the expenses charged by fund houses to investors. This process culminated in the release of a discussion paper in May 2023, inviting feedback from industry stakeholders. However, deliberations on the matter at the Sebi board level in June 2023 did not yield any conclusive decisions. The mutual fund industry has expressed concerns about the potential impact of further regulatory changes on their operations, which has likely contributed to the status quo approach outlined by Pandey.
Highlights:
TER reflects the costs involved in managing mutual funds, affecting investor returns.
Sebi’s internal study on TER had a significant impact on the industry.
Despite previous consultations, no decisive actions have been taken yet.
The Broader Context: Simplification of Financial Regulations
Pandey’s statement also highlighted Sebi’s broader effort to simplify regulations across the financial market. Drawing a parallel to discount broking firms, where many entities do not levy brokerage fees despite existing regulatory caps, he underscored the diversity of practices in the financial industry. Sebi’s approach aims to create a framework that encourages competition while ensuring fairness and transparency. This overarching goal of optimum regulation seeks to make the capital markets more accessible and efficient, addressing both investor interests and industry concerns.
Highlights:
Sebi’s broader aim is to simplify financial regulations and ensure fairness.
A parallel was drawn with discount broking firms for illustrating regulatory flexibility.
The focus is on creating a competitive yet transparent market environment.
