There are excellent regulations in the capital market for product providers. They are regulated by the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority. Stock broking, too, is regulated by Sebi and the exchanges. But regulatory framework for investment advisory activity at best can be defined as patchwork. It has evolved in a product-centric rather than a customer-centric manner.
If we desire to make investment advisory industry customer-centric (which seems to be the case, especially with Sebi, and evident from the abolition of entry load), the reform process needs to be followed till its logical end.
For advisers who want to practise this profession without getting attached to product providers, there is no regulatory framework (portfolio management services, or PMS, regulation is a limited exception). Apart from investors, it is not good for practitioners as well. The situation allows unscrupulous elements to go unpunished which gives a bad name to the entire profession and leads to trust deficit for the profession.
At present, the primary regulator of an entity is not responsible for the product which is regulated by another regulator. For example, if a bank mis-sells a unit-linked insurance plan, the banking ombudsman or RBI will not entertain the complaint of the investor. They only entertain banking-related complaints. The only recourse is to go to the insurance ombudsman who does not directly govern the bank.
The irony of the situation can be explained by comparing it with the medical field. If regulations for medical practitioners were the same as that for the investment advisory profession, then doctors may be primarily governed by the state medical councils (SMCs) but the licence to prescribe drugs will be granted by an all-India pharmaceutical association (AIPA) and the licence to perform surgery will be granted by an all-India surgical equipment manufacturers association (AISEMA). If he is found guilty of prescribing wrong medicine, then the patient will have to complain to AIPA. If the doctor is found guilty, at the most AIPA will ban him from prescribing medicine. But since this does not fall into the jurisdiction of SMCs, he will be free to provide consultation and since even AISEMA will not be affected, he can still continue to perform surgery. Isn’t it ridiculous?
For providing a comprehensive platform, a new framework is required. But some impediments need to be removed urgently. For example, the fee-only model still has some legal grey areas.
Clarification is required in case the adviser, who does not want to earn any commission from the product provider but at the same time wants to assure cheaper cost to his client, should be able to offer a fee offset model (where he gives credit of commission back to the investor and charges less fees) and it should not amount to refunding of commission.
Also, there is a perception in some quarters that if an adviser charges advisory fees for giving investment advice for securities, the advising entity requires a PMS licence. If this is true, no investment adviser can practise investment advisory business for a fee if they do not have a PMS licence, which requires a capital of Rs2 crore. Moreover, the licence holders cannot offer such advice to clients having less than Rs5 lakh.
Such roadblocks are preventing the takeoff of client-centric investment advisory business and shall be dealt with at the earliest. Apart from these impediments, the following measures can also be looked at for giving the investment advisory profession another headstart.
•Introduce only non-discretionary PMS licence: The present PMS licence covers discretionary and non-discretionary portfolios. A step-down version with only non-discretionary portfolios can be offered with the following modification—minimum capital of Rs5 lakh; no minimum portfolio size; apart from all securities (including foreign), investments to be allowed in company fixed deposits, venture capital funds, life insurance products; and mandatory custodian.
•Introduce non-institutional custodian category: This can be a licence for the providers of platform or account carriers to investment advisers. It can have the following modifications compared with the traditional custody licence—minimum capital of around Rs5 crore (compared with Rs50 crore); and cater to only non-institutional investors.
•Introduce the concept of registered representative: For an individual (giving investment advice), either employee or an independent needs to register; the registration should be valid across product categories; passing an entry level exam should be made mandatory; details should be available to investors; details of past strictures, employment record and licences in force should be available to potential clients.
The investment advisory profession in India requires a regulatory nudge to reach a sweet spot which can give unprecedented growth in the coming years. We hope that the nudge will come sooner than later.
Rajan Mehta is executive director, Benchmark Asset Management Co. Pvt. Ltd. This is the concluding part of the series.
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