Just in line with the SEBI’s proposal on RIA regulations, the RBI committee headed by Dr. Tarun Ramadorai, Professor of Financial Economics, Imperial college London, has proposed segregation of distribution and advisory activities in the financial distribution space. However, both – distributors and advisors will have to follow fiduciary standards, suggested the committee.
The committee said, “We propose that advice and sales of financial products be separated, supported by a fiduciary standard. We note that this is not the current structure of the finance industry and propose that this transition be phased in.”
In fact, the committee has suggested uniformity in advisory activities across products and regulatory jurisdictions. The report said, “We propose that the first step in this direction is the convergence of advisory activities across products and regulatory jurisdictions.”
On fiduciary standards, the committee has said, “We propose that an investment advisor shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise. The fiduciary duty of the investment advisor towards the client may be defined clearly in the regulations. An investment advisor shall ensure that in case of any conflict of interest of the investment advisory activities with other activities, such conflict of interest shall be disclosed to the client immediately.”
The committee has proposed rationalization of commission across financial products. Simply put, the committee wants uniform commission structure in equity funds and ULIPs. Further, the committee has proposed that manufacturers of financial products should disclose commission structure and incentives of their distributors in the account statement sent to investors.
Another key proposal is tagging of the schemes. The committee has proposed putting tags such as distributor code and advisor code with uniform nomenclature across financial products. This will help customers to understand the difference between regular plan and direct plan in a better way, believes the committee.
Further, the committee has proposed introduction of ratings of advisors to help investors take informed decision. “In order to help investors take informed decisions on choosing financial advisors, information about financial advisors, including their expertise, business volume, past credentials, and quality of recommendations should be centralised and made available online. In this regard, the committee notes that FPSB has designed a Rating Model for Advisors, which takes into account parameters to assess the quality of services offered, compliance standards, and professional conduct to arrive at scientific grading. The platform on which this would be made available could help financial consumers to choose the right advisor.”
In addition, the committee has recommended putting in place a mechanism for investors through which they can give their feedback on advisory services in a single platform which can be jointly managed by all financial regulators such as RBI, SEBI, IRDAI and PFRDA.
Also, the committee believes that robo advisory is the way forward. It has recommended all the regulators to encourage robo advisory model in India to increase penetration of financial products in a cost effective manner. “The committee believes that technology can play an important role in cost effective expansion of financial advisory services. To quickly scale up the availability of advice across the country, automated advice is a good strategy subject to the right checks and balances, and the committee supports the continuing development of robo-advisory services. The committee notes here that different regulatory agencies have not been clear about the legality of providing robo-advice, and so we currently see that the maximum number of such firms are operating in the context of mutual funds. We therefore propose that all four regulators clarify that robo-advice is permitted, once again subject to the right checks and balances,” says the committee.
In April 2016, RBI had set up this committee to look at various facets of household finance in India and put recommendations to enable better participation of Indian households in financial markets.
