Sebi concept paper to regulate investment advisors

In a move aimed at addressing conflicts of interest in distribution of financial products, the Securities and Exchange Board of India (Sebi) has issued a concept paper to regulate investment advisors. The capital market regulator intends to regulate investment advisors through the Self Regulatory Organisation (SRO) route.

The proposed regulatory framework is on the activity of providing investment advisory services in general, not limited to securities, insurance and pension funds. “While the activity of giving investment advice will be regulated under the proposed framework through an SRO, issues relating to financial products other than securities shall come under the jurisdiction of the respective sectoral regulators,” said Sebi.

The 11-page report is on Sebi's website for public comment till October 31.

"It is axiomatic that any industry, in order to achieve scale and high productivity, must be free of internal contradictions and conflicts of interest. The financial product distribution space is particularly fraught with these conflicts," said the paper.

The regulator said it was necessary to resolve or at least mitigate these conflicts. The products are intangible and conceptually more difficult to understand and the pay-offs are in a distant future which can be camouflaged by several factors external to the product, it said.

Sebi termed the dual role played by distributors as an agent of investors as well as of the manufacturers a major conflict of interest. Currently, an agent receives commission from the manufacturers and advisory fees from the investors. "This immediately raises the question: Whose interest do they represent?" said Sebi in its paper.

According to the concept paper, the person who interferes with the customer should declare upfront whether he is a financial advisor or an agent of the manufacturer. Second, an advisor would be subject to the Investment Advisors Regulations and would require a much higher level of qualification.

"He (financial advisor) would receive all payments from the investors and there would be no limits set on these payments," said Sebi. The regulator made it clear that agents associated with manufacturers will be prevented from styling themselves as financial advisors.

Further, the regulator said that names like wealth managers and private bankers cause confusion as to their role and responsibility. "The regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an Investment Advisor," added the paper. More, entities registered as portfolio managers need to be registered only as investment advisors after their present registration expires.

Individuals who wish to register as advisors under the regulations would require to have a professional qualification from a recognised institute.