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SEBI’s investment adviser regulations: The hits and the misses

There are good points out there, some that non-controversial and acceptable, and others that are problematic

July 27, 2020 / 09:32 AM IST

The Investment Adviser (IA) Regulations 2013 have been amended now after over seven years. During this time, there were different ideas floated about the direction that the IA Regulations need to take.  Now, finally, they are out. There are many good points in the regulations.

Some welcome moves

Client-level segregation is one such. It allows the family members of an individual to be involved in both advisory & distribution, ensuring that they do only one of these activities at the family level. Similarly, at the corporate level, such client-level segregation can be done at the group level. This helps preserve existing business income streams and, at the same time, avoids conflicts of interest.

Allowing investment advisers to implement their recommendations, albeit without charge in direct/ non-commissionable products, is a welcome move.  This need was felt by clients.

Preventing distributors from using designations such as Independent Financial Adviser / Wealth Adviser or other such designations is a good move again, as the use of such terms is a misrepresentation of their status and what they do.

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Suggestions for detailed terms and conditions of investment advisory services, again, clearly state in writing, the scope of the engagement as well as fee-charging mechanisms and avoid unwanted ambiguity and complaints.

There are however some points in the amendments which are not conducive for the growth of the advisory community.

Tough measures

Compulsory corporatisation – when the level of 150 clients is reached – for individual IAs is one such problematic area. Many such IAs may not have the wherewithal for such a move – especially the net worth criteria of Rs 50 lakh. Besides, it is presumptuous to assume that individual IAs cannot support over 150 clients, as they too can recruit Persons Associated with Investment Advice (PAA) and competently handle any number of customers.

This is against the interest of individual IAs. If compulsory corporatisation is an important objective, then the criteria should be such that an individual IA would not have any problem with the transition.

A suggestion would be to make this criterion turnover based rather than making it dependent on the number of clients. The turnover should be sufficiently high –  Rs 10 crore and above – when it is sought to be made compulsory.

Trying to put a cap on fee with an absolute number is problematic, as the limit will remain at that number in the future as well. This brings down the fee-charging capability of an IA, over time. Ideally, fee capping should not be done through regulatory fiat. The level should be determined by the parties concerned.

Prescribing fee norms, not desirable

SEBI should seek to enforce strict adherence to the letter and spirit of the regulation and not get into setting fee caps. This kind of fee capping is not there in any other profession – medical, legal, accountancy, architecture etc. Yet they function quite well in their areas.

Also, the fee-charging mechanisms have been framed with the assumption that all advice is ongoing. That is not true.  In fact, a lot of advice is one-time and IAs should have the ability to collect their fees for it then and there. For one-time engagements, there should be a provision in the regulation to collect the fees immediately (and not wait for six months for one portion). This amendment is very necessary.

Also, not allowing a fixed and variable fee model running concurrently in a year is unhelpful, as this is at variance with practices across the globe.

Qualification requirements have gone up. This will be a problem while recruiting PAAs, as finding compliant candidates as well as being able to afford a suitable remuneration for them could be tough. For PAAs, the criteria can be lower, with oversight done by the IA.

The other vexatious issue is about not allowing the renewal of Certification by fulfilling the CPD points criteria. The objective of Continuing Professional Development (CPD) is to ensure that certificants are exposed to new trends, knowledge, skills etc., which could help them stay current and relevant.

Making a person write the exams all over again does not in any way make the person better. In fact, such an exercise is futile as he/she will again have to go through what he/she already knows and take the exam.

Renewal of certification through CPD points is a globally accepted norm; it is that way for a reason. If SEBI wants to introduce certain standards in the way CPD points are awarded or wants to ensure that the certificants are exposed to new knowledge/ skills then that would be a welcome move.

SEBI has done well in bringing in the amendment and strengthening the Investment Advisory regulation. As pointed out, there are good points out there, some that non-controversial and acceptable, and others that are problematic.  Regulating advice and getting the direction right are uncharted territories for SEBI as well as regulators globally.

The regulation needs to work well for all stake holders.  The regulator should be open to suggestions so that they work well in the best interests of everyone.

(The writer is a SEBI Registered Investment Adviser & Founder Ladder7 Financial Advisories)
Suresh Sadagopan
first published: Jul 27, 2020 09:32 am

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