It is not often that one finds an existential question in a dry piece of financial sector regulation. But read the Securities and Exchange Board of India (Sebi) Investment Advisers Regulation 2013 (http://goo.gl/4b5RK) carefully and you find the question “who am I?” being asked of the financial intermediaries who face the retail investors. This piece of long-awaited regulation puts in place the grid that will define all future regulation in retail financial intermediation by making a strong distinction between a person who simply sells a financial product and one who advises the buyer. This is the same distinction that we make between a doctor and a chemist. We do sometimes seek the advice of a chemist on what to take for a simple headache, but we know we’re doing something wrong to take a strong course of antibiotics on the over-the-counter advice of a vendor. We know that we’ll have to pay the doctor’s fee to get an expert opinion on a medical condition. Retail-facing financial intermediaries need to decide who they are: sellers or advisers.
From 21 April 2013, anybody who charges for giving investment advice to clients in India will need to be Sebi-registered. This entity, whether an individual or a partnership or a company, should not be compensated in any manner by the product manufacturers—so no upfront, no trail and no trips to Turkey—and must earn only from the client a fee for service. A Sebi-registered adviser will have to jump through hoops of capital adequacy, qualification and certification. Once registered, the adviser (individual or company) will have to act as a fiduciary towards clients and ensure that the products advised are suitable. This is important. A fiduciary capacity is one that is associated with the highest standard of care towards the client where a fiduciary puts the client’s interests above his own. The Sebi-registered adviser will be a fiduciary. Those thinking of this registration must understand the legal implications of the term before filling up the forms. Two, the adviser must recommend products that are suitable, or are products that work to solve the financial problem that the client has come with. Suitability has emerged globally as a foundation of most regulatory changes in retail facing financial regulation. Again, those filling forms must understand the term in its entirety before wearing the registered adviser hat.
A long list of exemptions ensure that the large army of feet-on-the-ground who sell financial products are not affected nor are regulatory turfs crossed. It is for the other financial sector regulators to step forward and recommend that advisers of the products they regulate are encouraged to abide by this regulation. The Reserve Bank of India (RBI) needs to ensure that banks fall in line because bank branches are dens of mis-selling at the moment. RBI must lean on banks to get Sebi Adviser Regulation-compliant. The regulation navigates the regulatory turf quagmire of dealing with banks by asking banks, non-banking financial companies (NBFCs) and other corporate bodies that have bundled advice and vending to segregate the two. What this means is that the bank branch will now have two desks. One, where you will get a financial plan made for a fee and two, where, if you want, the plan can get executed. Think of the new corporate hospitals. You pay a fee to the doctor on the second floor and then come down and get the prescription filled at the chemist’s shop on the ground floor. You could just as well phone your neighbourhood chemist, who will home-deliver the prescription. Of course, this is the ideal world situation and banks will find a hundred ways to step over this regulation. RBI will need to show it has mind-space beyond dealing with inflation to put in place internal checks to ensure that this distinction is maintained. Sebi should consider adding an additional line to the section that deals with this to ensure that banks, NBFCs and companies that have advisory and distribution desks do not sell unadvised products to the client who pays a fee for a financial plan. The vending arm should just fill the prescription and not apply its twisted mind to the client’s money. As consumers we need to push this as well by asking our banks again and again if their advisers are Sebi-registered.
But what if the advisers don’t follow the regulation? A small para right at the end of the regulation gives a hint to the direction in which this is going. The code of conduct for a corporate body registered as an adviser says that the senior management will bear “primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the body corporate”. I strongly believe that the minute top management is responsible for mis-selling, it will magically vanish. Section 9 of the third schedule says that we may be on that road.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at email@example.com