Why Sebi is batting for a ‘radical’ performance validation agency

The Sebi Chairperson Madhabi Puri Buch has a simple test for people who are confused about what claims they can make to sell their products or services.

With the market regulator getting various representations from the investment advisory industry, asking for a leeway to promote their services, the Securities and Exchange Board of India (Sebi) proposed the “radical” Performance Validation Agency (PVA), said Sebi Chairperson Madhabi Puri Buch.

Buch was speaking at a conference organised by the Association of Registered Investment Advisors (ARIA) on October 4. She was talking about the regulator’s willingness to co-create the guardrails with the industry.

On August 31, the regulator issued a consultation paper that proposed the setting up of the agency to validate claims on performance related to investment advice, 'buy/sell/hold' recommendations, mutual fund schemes, portfolio management services, algorithms, and more by registered intermediaries and other entities such as Investment Advisors (IAs), Research Analysts (RAs), portfolio managers, Asset Management Companies (AMCs), and stockbrokers. It is being planned as an agency that would function as a subsidiary of a Market Infrastructure Institution (MII) or as a jointly supported entity by multiple MIIs.

Investment advisors have approached Sebi and asked the regulator how the advisors were meant to sell their services, if they were not allowed to make claims about the returns, said Buch.

Even consumer products such as washing powder were allowed to make claims about their effectiveness, so why were the advisors not allowed to, they asked.

“We took that feedback on board… sahi baath hain (it is right). Whatever you don’t allow over the table will go under the table. Whatever you don’t allow in the sunlight will go into the darkness. Therefore, we have our consultation paper on Performance Validation Agency… this is a radical development,” she said.

“When there is a genuine need in the market, we want to address it… we want to get to that one million (registered advisors). But we need to make that distinction between fact versus fake (claims),” she added.

Buch then spoke about algo traders who claim that their products can generate 300 percent returns and so forth. When questioned, they presented retrofitted data.

That is, they will present their product as functioning in the most advantageous circumstances, instead of testing it across scenarios including the most challenging ones.

“Humko bewkoof samajhke rakha hai (They think we, the regulators, are idiots),” she said.

She said that she suggests a simple test to people who are in doubt: “Will you recommend your platform (product/service) to your mother-in-law?”

“Maaji kha jayegi (she will finish you) because the first time she makes an investment (through your offering) she will lose it all,” said Buch, who speaks with candour.