A concept paper released by SEBI states that banks and financial advisors have to be registered under this Self Regulatory Organization
SEBI plans to regulate investment advisors through a Self-Regulatory Organization(SRO) which will register, set professional standards, certify, lay down and enforce rules and regulations for investment advisors, according to a concept paper released by SEBI on Monday. The regulator move to regulate the advisors is mainly to protect the conflict of interest among financial distributors.
The entities, which include banks and fund managers, would have to be registered with a SRO as an investment advisors, said the concept paper on Regulation of Investment Advisor issued by SEBI.
The concept paper said that the SRO will take up disputes and complaints arising out of investment advisory with the respective regulator, i.e. SEBI for mutual funds, IRDA for insurance and PFRDA for NPS.
The concept paper is intended to clear the confusion among investors about wealth managers, private bankers, and portfolio managers. It also said that the advisors should be strictly identified as ‘investment advisors’ and not by names like wealth managers or private bankers. Besides, they should be highly qualified.
“This causes much confusion as to their role and responsibility. Hence the (proposed) regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an investment advisor under the regulations,” SEBI said.
This would help in resolving two areas of conflict of interest prevalent today, said SEBI. Distributors play a dual role as the agent of both the investor and the financial product manufacturer, getting paid from both ends. Such divided loyalty is not in the best interest of stakeholders and results in a situation where the distributor is loyal only to himself; churning investors' portfolios and squeezing more commission from the manufacturer.
The second is the preference of one manufacturer over the other on the basis of commission received, leading to a scramble among them.
SEBI said that only professionals (CA/MBA or similar) with at least 10 years' experience, armed with SEBI-approved NISM certification and fulfilling its fit and proper criteria are eligible for registration as investment advisors.
Non-individual entities would also be required to maintain a minimum net worth separately for investment advisory, have at least two key personnel with the above qualifications, and the necessary infrastructure to discharge their functions.
The concept paper has proposed that all investment advisors will act only in the best interest of their clients (fiduciary responsibility). In case they provide other services such as broking, demat etc, they should maintain a Chinese wall between advisory and other services and must disclose them to the client, said SEBI.
They should advice clients only after doing proper risk profiling and cannot indulge in misleading advertising or use client testimonials, said SEBI.
Investment advisors cannot receive any money from anyone other than clients and must clearly indicate fees and charges payable along with detailed information about their businesses, history, and terms and conditions for advisory. They are expected to maintain voice and data records of every investment advice, facts and opinions that they provide, for at least five years, said SEBI.
They cannot outsource any activity except research reports and shall not be liable for civil and criminal liability for their advice unless negligence or mala-fide intention is established.
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Click here to Read: CONCEPT PAPER ON REGULATION OF INVESTMENT ADVISORS
