Over the last few years, the regulator has been consistently trying to separate the research and advisory functions from the sales function. The apprehension was clearly that combining advice and sales would create a clear conflict of interest. That would mean, advisors should not derive any benefit from the sale of the product. Instead, the advisory services should be separately charged to the client and should be based on the forces of demand and supply. While this intent has been the core of SEBI policy and regulation for a long time, it has now been given a formal structure in the form of Investment Advisory rule and regulations.
SEBI tightens norms for advisors to prevent mis-selling
To put this point in perspective, think of an advisor who is the agent for a particular mutual fund. In that case, the advisor would be inclined to recommend funds from that particular AMC even if they do not exactly fit into the financial planning matrix of the investor. That is the most basic form of mis-selling and can only be avoided by separating the advisory and selling functions. It is on these lines that the regulator has proposed as under.
- Under the new regulations, SEBI has specified that an entity can provide either advisory services or distribute financial products but cannot do both functions
- In short, SEBI has barred investment advisers from simultaneously selling financial products and advisory services. SEBI has also capped the fees they can charge their clients to prevent guising of sales commission as advisory fees.
- To avoid offering multiple services under different names, SEBI has redefined “Entity” to include family comprising dependent spouse, children and parents.
- These regulations were necessitated because certain entities registered with SEBI as investment advisers had guaranteed returns and recommended high-risk products to clients not suited for them.
- The regulator has clarified that it is OK to have two corporate entities under the same parent providing advisory and distribution services. That would mean that individual advisors would be hit more sharply than corporate advisors.
- In addition, SEBI is also laying out enhanced eligibility criteria to register as an investment adviser like higher net worth and qualification requirements. However, existing advisers will be “grandfathered” (immune).
- The new regulations talk about the formalization of an agreement between an adviser and a client. This is expected to help freeze the relationship in concrete terms and build relevant expectation. That is the key to the relationship.
- There are some restrictions on the nomenclature front. For example, fund distributors cannot call themselves “independent financial adviser” or “wealth adviser”. This will ensure that the client is in no doubts about the actual role played by the intermediary.
- SEBI has also proposed a fee of 2.25% of assets under management or an absolute amount of Rs.75,000 per annum. The fee can be charged for up to two quarters but cannot be entirely charged upfront. The rupee amount does appear impractical.
- Finally, SEBI also cleared norms for regulatory sandboxes. These sandboxes are already being used in the trading environment and allow live testing of new financial products or services in a controlled environment. The regulatory sandbox will allow companies to test their Fintech solutions in isolation from the live market. To incentivize a more Fintech based approach, SEBI will also grant innovative ideas certain relaxations from regulations and guidelines hampering the proposed innovations and acting as barriers to entry of new products.
The crux of the regulations appears to be to draw Chinese walls between the advisory and the sales function. That was long needed. However, the intent of the regulations must be to help create a large army of independent financial advisors to ensure that the mutual fund cult spreads in a big way across second tier and third tier cities. That may be curbed if regulations are too stringent.