Mumbai: The government is planning to regulate the Rs1 trillion wealth management and investment advisory industry by making changes in the existing laws that govern financial sector regulation. The growing wealth management industry in the world’s 10th largest economy has remained a blind spot, not regulated by any of the five financial regulators in the country.
Since these financial advisers deal with different asset classes and tread different regulatory turfs, the norms for regulation will be worked out at a common forum such as the Financial Stability and Development Council (FSDC), according to two persons familiar with the discussions currently going on. FSDC is the apex body of regulators, headed by the finance minister.
The government is in talks with financial sector regulators such as the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority, the Forward Markets Commission and the Pension Fund Regulatory and Development Authority (PFDRA) to make necessary amendments in their respective Acts and create specific provisions for regulating wealth management and investment advisers.
“The Acts governing India’s financial regulators will have to be amended to introduce investment advisers’ regulations,” an official with one of the financial regulators said. “There could be a separate Act for this.”
A 2007 Sebi draft paper on regulations for financial advisers and the recommendations made in 2009 by a committee on financial intermediaries, headed by former PFDRA chairman D. Swarup, will be taken into consideration while framing the regulation, the official added.
In 2007, the market regulator had put out draft regulations for investment advisers on its website, but the plan was shelved as there wasn’t enough clarity on which regulator should regulate what. The Swarup panel made sweeping recommendations and drew a road map for financial sector intermediaries to move from an agency to an advisory model in a phased manner. The report has not been made public.
“This time, the government is a lot more serious, especially after the Citibank fraud. The regulations are likely to be finalized shortly,” said another official at another financial regulator. Neither of the two officials was willing to be identified considering the sensitivity of the issue.
The government has stepped in after a Rs400 crore fraud came to light in Citibank’s Gurgaon branch, where a relationship manager lured clients into investing in a fictitious investment scheme. At least 40 high networth individuals and corporations invested around Rs400 crore in the scheme that promised guaranteed returns of 2-3% per month.
While the new regulations, along with a complaint redressal mechanism, will benefit investors, it could also lead to an orderly development of the wealth management and investment advisory industry, which has grown rapidly in recent years as the economic boom multiplied the number of dollar millionaires in India.
“In the wealth management space, people are happy when they are making money. But if something goes wrong, the current laws do not empower any of the financial regulators to take appropriate action against anybody,” one of the officials quoted above said.
At present, Sebi governs the portfolio management services (PMS) in which both the money and underlying securities are vested with the portfolio manager. Banking services are regulated by RBI. But neither covers wealth management solutions and investment advisory services, where securities and other financial assets are bought by the client, based on advice given for a fee.
The business of wealth management in its current form evolved after the banking regulator banned banks from running portfolio management schemes, which were at the centre of the securities scam of 1992. Portfolio management schemes run by public sector banks diverted large sums of money, collected outside the stringent risk control measures applicable for normal deposits, into the securities market.
After the RBI ban, some foreign banks, pushed by the growing needs of their customers, created a new structure wherein the custody of the money and securities remains with the client and the bank offers advisory service. This has created an avenue for banks to earn fees. Since banks cannot directly handle the money, the now ubiquitous relationship managers came into the picture.
According to an August report by Swiss bank Credit Suisse Group AG, the total wealth in India has tripled in the past decade to $3.5 trillion (Rs158 trillion). It has projected that by 2015, India’s wealth could nearly double to $6.4 trillion.
“A very small proportion of the adult population (0.4%) owns more than $100,000 on average. However, this group has been increasing fairly quickly in recent years and the rate of growth is expected to rise in future if India’s economy continues on its current trend,” the report said.
Dinesh Thakkar, chairman and managing director of Angel Broking Ltd, said he found it difficult to build a wealth management platform that satisfies all customer needs within the existing framework.
“There are many solutions in the market, but these need to be highly customized at the back-end. Equity will be covered by PMS regulations of Sebi; real estate is unregulated; and in commodities, PMS is not allowed. There is huge potential for this industry, but if organized players have to enter this market and grow it fast, there should be some clarity in regulation,” he said.
In the absence of clear regulations, wealth management platforms have different structures to cater to customer needs. While they follow a single-window approach towards customers, the back-end is crowded with different structures, depending on the asset class and tax planning requirements of the customer.
“Sebi is best placed to regulate the advisory business. It has the resources, understanding and experience in managing this kind of a business. Also, most portfolios have a capital market component of 60-70%,” Thakkar said. He is against the idea of creating a regulation from scratch as it “may take time for it to become effective”.
“Everybody is reasonably sure about a clampdown. The question is: when and how? Different regulators need to sit together and create an umbrella regulation, rather than doing it in silos,” said the country head of a foreign bank-owned wealth management firm.