If Chicago broke it, will London fix it?

Expense Account, Mint

If the Chicago School got the world into trouble, here is an attempt by the London School to set it right. The perception across the world of economics and finance is that it was the hard influence of the market-is-always-right doctrine of the Chicago School of Economics that set off the global financial crisis in 2008 when big finance grew in power over regulators and governments. Searching for a way to rewrite the rules that allow top management to get disproportionate returns for taking risks with other people’s money and lives, the British economist John Kay, visiting professor at the London School of Economics, was commissioned by the British business secretary Vince Cable to review the equity markets and devise a new set of road rules. Released in July 2012, the “Kay Review of UK Equity Markets and Long-Term Decision Making” asks a basic question: what are the key objectives of equity markets and do the markets in the UK meet these objectives? If the objective of the equity market is to earn returns on investment that meet long-term financial goals of the country, concludes the report, the equity markets are not effective anymore. The reason for this inefficiency is the breakdown of trust and confidence of savers and investors. Writes Kay: “Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds, and the trust and confidence of investors in the businesses they support.” The key problem identified is too many middlemen and their incentive structure that rewards short-term behaviour. His prescription to solve this problem is to move the market away from short-termism and over-trading and to make the sellers of financial products and managers of other people’s money more responsible through a fiduciary standard.

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Indian funds are the cheapest and cleanest in the world

Expense Account, Mint

Now that the dust has settled over last week’s announcements by the Securities and Exchange Board of India (Sebi) and the merits or otherwise of the hike in mutual fund costs have been chewed over, two issues have emerged that still need a comment. One, that Indian funds are the most expensive in the world. Two, that the changes are pro-big fund houses.

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Is it financial freedom we want or hands-free money management?

Expense Account, Mint

A friend’s driver got a Maruti Dzire as a gift along with his son’s bride. With plenty of ancestral land at his disposal, he does not need the job to pay his bills. But his ambition was to get an “office” job as a driver so he could set out each day in a uniform and have some status amongst the loafers in the community who were similarly land-endowed. The guy is financially free and yet he clocks in an eight to 10 hour day burning rubber as he vrooms through the city.

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Financial well-being = order in marketplace + financial literacy

Expense Account, Mint

The draft National Strategy for Financial Education (you can read it athttp://www.sebi.gov.in/cms/sebi_data/attachdocs/1342416428845.pdf) put together by the apex regulatory body, the Financial Stability and Development Council (FSDC), is up for public comments right now. It is a joint effort by various financial sector regulators to have a common road map for getting 500 million people financially literate over the next five years. This is a goal that is very hard to argue against. Financial literacy is one of those “good” things that battles two charges globally. One, its efficacy is not clear. Reams of research give inconclusive results about the final outcome of a financial literacy class, initiative or programme. Two, and this is more damaging, the disclosure and education road is one that moves the regulatory burden over to the consumer. Born in the US, this concept is the brainchild of a Wall Street weakened regulatory approach. Disclose product specifications to a financially literate consumer and the buck smoothly moves from the regulator to the consumer and the actual buck moves from the clueless consumer to the seller. This approach knows, for example, that by the time the educators catch up with the latest product alert, the producers and sellers would have moved to the next level. And that asymmetry of information will always benefit the seller rather than the buyer.

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PFRDA uses a supply-side hammer on a demand-side issue

Expense Account, Mint

As India’s various regulators meander their way through understanding what their role is, the need for a crash course in regulatory basics looks more important by the day. Registration of Pension Funds for Private Sector Guidelines announced on 12 July by Pension Fund Regulatory and Development Authority (PFRDA), have changed the basic structure of the National Pension System (NPS). A committee headed by G.N. Bajpai, former chairman of Securities and Exchange Board of India, had suggested changes in NPS aimed at increasing coverage. The first of these changes was implemented early this year with the sales charge changed to 0.25% of the invested amount, with minimum and maximum caps at Rs 20 and Rs 25,000, respectively. While it is still early days to say if this had any change in the number of investors buying into the product, PFRDA has gone ahead and implemented the rest of the report. This changes the investor-friendly and unique nature of NPS and has made it just like another collective investment scheme that will now compete with mutual funds and unit-linked insurance plans.

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