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Business News/ Markets / Stock Markets/  Sebi tightens norms for investment advisers to prevent mis-selling

Sebi tightens norms for investment advisers to prevent mis-selling

The regulator said an entity can provide either advisory services or distribute financial products
  • Sebi cleared norms for regulatory sandboxes, allowing the live-testing of new financial services in a controlled environment
  • Sebi chief Ajay Tyagi during a press conference after the board meet in Mumbai on Monday (Photo: Aniruddha Chowdhury/Mint)Premium
    Sebi chief Ajay Tyagi during a press conference after the board meet in Mumbai on Monday (Photo: Aniruddha Chowdhury/Mint)

    MUMBAI : The markets regulator on Monday barred investment advisers from simultaneously selling financial products and advisory services, and capped the fees they can charge their clients, in an attempt to curb mis-selling and protect investors.

    From now on, an entity can provide either advisory services or distribute financial products to a client, which has been defined as a family that includes dependent spouse, children and parents. The regulator also cleared norms for so-called regulatory sandboxes at its board meeting.

    Several entities registered with the Securities and Exchange Board of India (Sebi) as investment advisers had attracted complaints of promising guaranteed income, overbilling and recommending high-risk products to clients not suited for them, prompting the regulator to issue a discussion paper in January.

    However, Sebi chairman Ajay Tyagi clarified that the regulator is okay with having two corporate entities under the same parent providing advisory and distribution services. “We are not insisting on separate subsidiary structure," Tyagi told reporters. This could potentially limit the benefit for investors, as it means that under the same brand, there can be two separate entities providing advice and distributing Sebi-regulated financial products.

    Previously, corporate advisers, including individuals who were conducting their business through corporate structures like LLPs, could distribute products and render advisory services to the same client simultaneously, provided the two services were separated from each other.

    A Sebi statement after its board meeting on Monday said there will be enhanced eligibility criteria to register as an investment adviser, including enhanced net worth and qualification requirements. However, existing advisers will be “grandfathered" (unaffected).

    “The segregation at the client level between advice and distribution was expected and will help minimize conflict at each client level, though it may force many clients to move away from a single person for advice and execution," said Sandeep Parekh, managing partner at Finsec Law Advisors. “The formalization of an agreement between an adviser and a client will help freeze the relationship in concrete terms and build relevant expectation."

    “On the positive side, nomenclature has been controlled. Mutual fund distributors cannot use the name ‘independent financial adviser’ or ‘wealth adviser’," said Vishal Dhawan, founder of Plan Ahead Financial Advisors, a registered investment adviser (RIA). “Also, existing individual RIAs have been grandfathered in terms of the experience and qualification requirements. On the negative side, the consultation paper had mooted allowing individual RIAs to provide distribution services to clients, who were not being delivered advisory services. This does not seem to have been accepted in the final board decisions."

    Sebi also cleared norms for capping advisory fees. In the discussion paper, the regulator had proposed a fee of 2.25% of assets under management or an absolute amount of 75,000 per annum. The fee can be charged for up to two quarters at a time and cannot be fully charged upfront.

    “The cap on fees adopted was required and the combination of flat and percentage fee will not crimp business and may impose costs on certain unscrupulous stock-tippers in the garb of advisers," said Parekh of Finsec.

    “Some provisions like upper limit on fees and enhanced eligibility criteria can only be analysed once Sebi puts out a detailed circular on them," said Suresh Sadagopan, founder of Ladder7 Financial Advisories, a Sebi-registered adviser. “However, a limit of 75,000 on fees proposed in the consultation paper and the qualifications and eligibility proposed in the consultation paper are not practical."

    The regulator also cleared norms for regulatory sandboxes, which will allow live-testing of new financial products or services in a controlled environment. Exchanges and market infrastructure institutes have already implemented their own sandboxes.

    A regulatory sandbox will not only allow companies to test their fintech solutions in isolation from the live market, but also enable Sebi to form policies and regulations encouraging them.

    The regulator will also grant these innovative ideas certain relaxations from some regulations and guidelines hampering the proposed innovations and acting as barriers to entry of new products.

    This was Sebi’s last full board meeting under Tyagi, who steps down in March if his tenure is not renewed. Whole-time member Madhabi Puri Buch will also step down in the last week of March.

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    Jayshree P Upadhyay
    Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 17 Feb 2020, 05:11 PM IST
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