Last week the National Stock Exchange of India (NSE) put out a circular, effectively telling brokers that they must stop providing fees to affiliates unless they are an Authorised Person, a position that requires regulatory approval.
Like almost any industry, retail-facing brokers in India provide a fee to anyone or any company that gets an individual to open an account with them.
The NSE’s circular seems like a way of putting a stop to this. It is not too dissimilar to concerns we have seen from other regulators around the globe. The main problem seems to be the manner in which social media influencers and other marketing partners are getting clients to onboard with a given company.
Understandable though this may be, the NSE’s circular seems like a blunt instrument that could actually end up having negative unintended consequences.
Huge numbers of people take part in referral schemes and other affiliate programmes. The CEO of Indian brokerage group Zerodha, Nithin Kamath, has said that over 1.2m clients have referred at least one other customer to his company.
Despite this, Kamath noted that Zerodha will now have to stop providing monetary benefits to affiliates, and can only give them reward points.
What does this mean in practice? Brokers like Zerodha will stop providing affiliate fees but the demand for those fees will not go away. Consequently, you are unlikely to see a large group of people rush to get regulatory approval from the NSE. Instead a decent chunk of them will sign up with offshore brokers, who won’t have to meet those regulatory standards and who will be happy to keep paying them affiliate fees.
A better solution would be to place the burden of responsibility on the end broker, rather than the affiliate marketing their product. This means that any brokers would be held culpable for any regulatory breaches or aggressive marketing practices undertaken by affiliates.
Brokers would be far more incentivised to police affiliate behaviour – assuming punishments were serious – than the regulator would be to try and find them. The result would be better for all parties – affiliates make money, brokers keep getting more clients, and regulators can feel more comfortable knowing that they can punish regulatory breaches if the need arises.