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SEBI’s decisions: Investors to gain, but a mixed-bag for advisers

There is now parity between corporate entities and individuals, as now even corporates cannot distribute products to their advisory clients

February 19, 2020 / 12:59 PM IST

Capital markets regulator SEBI (securities and exchange board of India) took a few key decisions in its board meeting held on February 17.  There are several areas that the SEBI has touched upon. The press release points to areas where major changes can be expected.

Promising prospects

The regulatory sandbox framework looks very promising, in that it is a live-testing environment in which new products, processes, services, business models can be tested out on a limited set of customers for a limited period of time, without being subject to the full range of regulations.

This is a wonderful way to test a proof-of-concept without getting into registration  and compliances. It is definitely a very forward-looking, enlightened concept from SEBI.

There is an overview of what changes are sought to be brought in the Investment Advisers (IA) Regulations 2013. Most of the changes suggested are excellent proposals that sharply focus on investors’ interests.


Bringing parity

Client-level segregation will apply to corporates now – they can either advice or distribute, not do both, as they do currently. Individuals registered as IAs will not be able to distribute products.

This is a good move that brings parity between corporate entities and individuals, as now even corporates cannot distribute products to their advisory clients.

Allowing Implementation Services by IAs in non-commissionable versions of products is a welcome move and is in investors’ best interests.

In the case of products (whether or not under the purview of SEBI) that do not have a non-commissionable version, the regulation should allow fee-offset of such commissions earned. This is an important enabling clause for an advisor to work in a fiduciary capacity, stay conflict-free and offer fee-only advisory services, across asset classes.

This aspect was not mentioned in the consultation paper 4 (CP4). Whether it would be added in the regulatory revision remains to be seen.

Cap on remuneration

Having a detailed agreement outlining the terms and conditions is a very good practice, as it ensures clarity and transparency. It is a welcome move to have full clarity on fees.

However, a cap on the remuneration, without regard for the work involved or complexity of the case, is a retrograde step that directly limits and impacts how much an adviser can earn. The CP4 puts a cap of Rs.75,000 per family annually.

The trigger for this move may be the malpractices  and complaints received by the SEBI against stock-tip providers who also come under the IA Regulation. But this will adversely affect and stunt the growth of true client-centric advisors, whose only source of remuneration is the fee they charge from clients.

This is akin to capping the remuneration of a lawyer at an arbitrary level of, say, Rs.30,000 per case, irrespective of the time and monetary implications involved and the complexity of the case itself.

Enhanced eligibility criteria on net worth, qualification, experience etc., for registering as an IA would be a huge barrier for new entrants, if the criteria are as mentioned in CP4. These may virtually stop new IA entrants due to the stiff eligibility criteria along with fee restrictions, making the advisory profession itself unviable.

Those dealing in the distribution of securities and called themselves Wealth Advisers, Independent Financial Advisers or other similar names cannot do so, as the same is now prohibited. This is vital in investors’ best interests, as distributors of products have been posing as Advisors to their clients – which is clearly a misrepresentation. Those who want to be Advisers should now register as IAs under the regulation.

In conclusion, overall, the changes are healthy.

Fee-offset for commissions earned on products that do not have a direct option, is needed as a part of the regulation.

However, in its drive to the curb malpractices of stock-tip providers, we do hope that SEBI does not hurt the prospects of genuine IAs.

(The writer is a SEBI Registered Investment Adviser & Founder of Ladder7 Financial Advisories)
Suresh Sadagopan
first published: Feb 19, 2020 08:36 am

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