Four financial market regulators are setting up a committee to explore the possibility of bringing mutual fund, insurance, banking and the yet to be launched pension fund agents and advisers under common regulatory surveillance. Representatives of capital market watchdog Securities and Exchange Board of India (Sebi), the banking regulator, the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (Irda) and the Pension Fund Regulatory Development Authority (PFRDA) will be the members on this panel.

(from left) Securities and Exchange Board of India chairman M. Damodaran, Reserve Bank of India governor Yaga Venugopal Reddy and Union finance minister P. Chidambaram

“We want to see if a unified approach can be followed towards regulating various kinds of advisers in the market," said C.S. Rao, chairman, Irda. “We will examine the existing procedures which are in place and see if it is possible to have a common qualifying test." The licensing of agents, however, would rest with the independent regulators, he added.

Currently, the agents or distributors selling financial products undergo a series of qualifying tests. Mutual fund agents or advisers, who are regulated by the industry body, the Association of Mutual Funds in India (Amfi), undergo a mandatory Amfi certification test before they can start selling mutual fund units. Similarly, insurance agents undergo a test and training programme prescribed by Irda. Stock market professionals, who are members of the National Stock Exchange (NSE), take part in the exchange’s certification in financial markets programme, which covers courses on various stock market operations such as depository, derivatives and surveillance.

However, the agents selling financial products do not operate in a compartmentalized world. A rising stock market and the growing popularity of mutual funds and insurance among retail investors have led financial services players to offer a whole range of financial products to clients. For instance, an adviser in deposit products sells a bank’s fixed deposit schemes, mutual fund units as well as an insurance product to the same client. Similarly, an independent financial adviser could be both an Amfi-certified and Irda-certified agent. The regulators want to put an end to the misrepresentation of financial products to customers while closing a deal and make the advisers more responsible. They are also concerned about the standards of the qualifying tests which the agents undergo to be eligible for selling the products. “The panel will look into all these issues," said a finance ministry official who does not wish to be named.

Sebi already has started working on a set of regulations for stock market advisers and may make a formal announcement after it gets the board nod. The idea of these regulations, as laid out in Sebi’s concept paper (available on its website), is to regulate those who give stock market advice for compensation. The regulations will prescribe a certification programme, which will be mandatory for all stock market advisers. It also would lay out a code of conduct and the consequences of non-adherence to the policy. According to a senior Sebi official, who didn’t wish to be quoted, the National Institute of Securities Markets (Nism) initially may undertake the regulatory supervision of securities advisers. At a later stage, an independent self-regulatory organization may undertake the responsibility of regulating advisers. Nism is a securities training school set up by the capital market regulator.

The Financial Planning Standards Board (FPSB), an independent private sector body that certifies Indian financial planners, had written to Sebi stating it could take up the role of the independent self-regulatory organization.

In mature markets such as the US, the market regulator Securities and Exchange Commission (SEC) has an Investment Advisers Act in place since 1940. Advisers managing client assets in securities above a certain amount have to register mandatorily with SEC. The Act outlays a comprehensive definition of an adviser, code of conduct and the penal action which can be taken for non-compliance with the rules laid out in the Act.

In the UK, where the Financial Services Authority is the single regulator for financial markets, the agency prescribes a financial planning certification programme and registers financial advisers who give advice on various financial products.

An independent, common regulatory body is expected to better address oversight on compliance issues, agent certification and promote best practices.

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