June 28, 2017

In order to bring in transparency in the working of investment advisers and prevent conflict of interest that exists between advising and selling of investment products, the markets regulator has proposed a host of changes in the Investment Advisers (IA) Regulations, 2013.

The Securities and Exchange Board of India (Sebi) has underlined that the investment adviser should act in the best interest of the client and should not receive commission from the product manufacturers. The advise will have to be offered after thorough analysis and taking into account the available investment alternatives and matching them with the customer’s suitability and needs. “Entities engaged solely in the business of advising on investment products shall not be permitted to sell any products to prevent conflict of interest,” says the regulator’s second consultation paper to amend the Sebi (Investment Advisers) Regulations, 2013, based on the feedback received from the public.

Under Regulation 22 of the IA Regulations, the regulator has proposed that banks, non-banking financial companies and body corporates offering investment advisory services through separately identifiable departments or divisions under the existing framework will segregate the same within six months through a separate subsidiary.

Investment advisers who provide advice on financial products across multiple categories like securities, insurance, pension and deposits need to obtain permission from the specific regulator and comply with the regulations of the respective regulators. Earlier, Sebi had underlined that distributors would get commission and investment advisers would be paid by the investor and will not receive any commissions from mutual fund companies.

Distribution of MF schemes
For clear segregation between advising and selling mutual fund products, the regulator has proposed that mutual fund distributors can only describe the features of mutual fund schemes of which they are distributors and distribute them while ensuing suitability of the scheme to the investor. The distributors should not give any investment advice and they should not offer any financial planning services to the investor that requires risk profiling and financial goal setting.

Mutual fund distributors who want to get registered as investment advisers will be allowed to receive trail commission for the products already distributed subject to disclosure to the clients. They shall not be allowed to sell/ distribute any investment products pursuant to grant of registration as investment adviser. The regulator has proposed to relax the educational qualification for representative of registered investment advisers. They can be a graduate in any discipline. The net worth requirement for body corporates is being proposed to be reduced to Rs 10 lakh from the current requirement of Rs 25 lakh.

Ranking MF schemes
Ranking of mutual funds is an objective statistical analysis of various parameters like risk and return, liquidity, performance for the past years which serves as the basis for investment decision by customers. The regulator has proposed that the activity of ranking of mutual fund schemes be brought under the regulatory ambit of the Sebi (Research Analysts) Regulations, 2014. A separate chapter will be made in the research analysts regulations on ranking of mutual fund schemes prescribing methodology, disclosure and other requirements. Entities providing ranking of mutual fund schemes will be required to register under the Sebi (Research Analysts) Regulations, 2014. The entity making the ranking will have to disclose the criteria, name of category, number of funds in the category and the data used for ranking different schemes.

If certain schemes of certain mutual funds are not ranked, the reason for non-inclusion should be disclosed prominently. Ranking must be current and the entity must disclose the holding of mutual fund schemes by its board of directors and promoters. The mutual fund ranking entity should act independently of the asset management company in assessing the mutual fund schemes’ performance. The markets regulator has sought comments from the public on the proposals regarding Investment Advisers Regulations, 2013, till July 14 and the final regulation will be put in place by the regulator after taking into account the views of all the stakeholders.

[The Financial Express]