Explained: Why is the new fee-collection mechanism for IAs, RAs both welcomed and feared?

If this centralised mechanism is operationalised and well-advertised, investors will have a way of knowing that they are paying to regulated entities.

The market regulator has announced the launch of a centralised fee-collection mechanism for registered investment advisors (IAs) and research analysts (RAs).

The opinion over this mechanism is divided, with some IAs and RAs worrying about increased compliance burden and costs, and other IAs/RAs and investors welcoming it as a much-needed reform.

Here is a breakdown of what is means and why it has market participants split.

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What is this mechanism?
It is a platform through which IAs and RAs can collect fees from their clients.

Will it be mandatory?
No. As of now, the Securities and Exchange Board of India (SEBI) has said that this will be an option provided to clients of IAs and RAs.

When will it be operational?
The regulator has asked BSE, which was a co-creator of the platform along with other industry stakeholders, to make it operational by October 1.

What will it look like?
The regulator has asked BSE to have the operational framework for the mechanism ready by September 23.

Going by the discussions market participants including RAs and IAs have had with the regulator, the platform is expected to be user-friendly and offer various payment modes.

It is likely to be one into which the IAs and RAs can enter the particulars and register their client, validate their client details and set up the fee-payment mode for each client (whether net banking, debit card, NEFT, UPI AutoPay, etc.). The funds thus collected will then be transferred to the IAs or RA's bank account that has been declared with SEBI as part of the intermediary's registration process.

The platform is expected to allow scheduled payments and ad hoc payments, as the client chooses.

Why was this mechanism needed?
The regulator has said this mechanism is being set up to ensure that investors are not defrauded by unregistered entities.

Investors are often promised unrealistic returns and sold get-rich-quick schemes by unregistered entities. The regulator has noted that there are people who may be unaware that they have to approach registered IAs and RAs, and who may not know how to check if these entities are registered at all, even though the regulator has the registered intermediaries listed on their website.

Investors are also defrauded by entities posing as registered IAs and RAs. These scamsters then collect the fee in bank accounts opened under other people's names, and disappear with the money by the time the regulator's investigation traces these bank accounts. It then becomes hard to recover this money.

If this centralised mechanism is operationalised and well-advertised, investors will have a way of knowing that they are paying to regulated entities.

Market insiders have also said that some of the registered intermediaries provide services they are not allowed to provide, such as fund management. With this new platform, these practices can come to an end as well.

This is because the IAs and RAs can customise their fee-collection structure but will need to enter the details of the services they are collecting the fee for. Therefore, they cannot enter services that they are not authorised to provide and cannot charge them exorbitant fees.

That said, this will only offer protection to investors who are unaware that their IAs and RAs are not allowed to do fund management and, therefore, pay them for such services. If the investor is aware that their IA or RA is not allowed to provide such services, and yet chooses to pay the intermediary for the service and record the payment as given for a permitted service, then this mechanism can do little to protect them. In any case, in such an instance the investor is willingly bypassing the safety net.

As the regulator has said, it is intended to give clarity to investors, give recognition to registered entities, help with investor protection, improve efficiency through a simplified payment process, andhelp with regulatory oversight over fee-related compliances.

Who will maintain the platform?
It will be administered by the SEBI-recognised Administration and Supervisory Body (ASB), which is currently BSE Administration and Supervision Ltd (BASL).

Were were the concerns raised by IAs and RAs, and have they been addressed?
During the discussions, the SEBI-registered intermediaries had asked for the mechanism to be made optional. This was suggested to give everyone, including the clients, more flexibility and give them more time to adapt to the new process, and to allow for testing and improvements with usage. The circular has said that this mechanism will for now be optional. That said, the regulator has said that the ASB and IAs/RAs should inform investors about this mechanism and encourage them to use the platform.

IAs and RAs had also raised worries that their clients may not be too happy sharing details such as investible corpus and risk appetite with the regulator. Currently, these details are only shared with the IAs and RAs, and they only have to be shared with SEBI if the regulator initiates an enquiry into the intermediary's operations. It is yet to be seen how the new mechanism will ensure privacy for investors.

The IAs and RAs also asked that the platform be easy to integrate into their current software, that it allow for payment tracking and reminders, fee-reconciliation, and digital enlisting of clients. Though the details of the mechanism are yet to be released, initial discussions suggest that the regulator is focused on ease of usage and adoption.

Along the same lines, the IAs/RAs had asked for various payment mechanisms to be made available to clients.