SEBI has finally come up with its Investment Advisor Regulations, but what will these regulations achieve with a long list of entities and products that are outside the scope of regulations?

The Securities and Exchange Board of India (SEBI) has finally announced its regulations to oversee financial advisors. From now on, anyone who wants to provide investment advice will have to register with SEBI and follow the rules contained in the new regulations. The regulations will not apply to the long list of products and entities:
 

a)  Any person who gives general comments where such comments do not specify any particular securities or investment product;
 

(b)    Any IRDA-registered insurance agent or broker
 

(c)    Any pension advisor registered with PFRDA
 

(d)   Registered distributors of mutual funds
 

(e)    Any  advocate,  solicitor  or  law  firm,  who  provides  investment  advice  to  their clients, incidental to their legal practise;
 

(f)     Any member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India, Actuarial Society of India or any such body
 

(g)    Any stock broker or sub-broker registered under SEBI, portfolio manager  registered  under SEBI or   merchant   banker   registered   under   SEBI
 

(h)    Any  fund  manager,  by  whatever  name  called  of  a  mutual  fund,  alternative investment fund or any other intermediary or entity registered with the Board;
 

(i)     Any person who provides investment advice exclusively to clients based outside India:
 

  (k)    Any other person as may be specified by the Board.

Interestingly the draft guidelines had proposed to exempt “investment advice given without any consideration through newspaper, magazines, any electronic medium, or broadcasting medium, which is widely available to the public”. Effectively the media was exempt from the proposed guidelines, but strangely this is absent in the final regulation. Does this mean that the media will have to stop writing about which funds or which stocks to buy? Or will it have to register with SEBI as an investment advisor? Has the media been dropped from the exempt list intentionally or is it another example of SEBI’s sloppiness?

Banks, finance companies other institutions that wish to enter into the advisory business need to create a separate department which would handle advisory and not be an agent. The idea is to prevent mis-selling and make banks and distributors accountable for their advice. How far is this workable? It is the small distributors who would be worst hit since the banks would always find a way around it. In fact, if SEBI is really serious about curbing mis-selling, it should have had a speedier grievance redressal system with stiff penalties. SEBI has been quite lenient in dealing with offenders as Moneylife (alone) has repeatedly pointed out. 
 

Read: SEBI’s draft regulation for investment advisors: Molehill out of a mountain?
 

Earlier, SEBI had issued a circular under which an agent will be able to sell for a commission (subject to a disclaimer that he has not done any due diligence) and won’t be able to advice. Considering the actual situation on the ground, a financial advisor asked, “How is an agent supposed to promote his product? Would he depend on the recommendation of the advisor?” Moneylife spoke to a smart and ethical distributor of financial products, who said, “I will not be a surprised if (these) so-called investment ‘advisors’ work closely with ‘agents’ wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent.” Expect this to increase, SEBI’s noble intentions notwithstanding.
 

Read: Will SEBI’s regulation on mis-selling of mutual funds work?
 

SEBI has also enshrined in the regulations that investors have to be profiled for risk including age, investment details, income details, risk tolerance, liability and others. Will risk profiling ensure that the lead will not be passed on to those agents who would share their commissions with the advisor friends?
 

Moneylife had analysed the proposed regulations and had suggested these regulations will be of little consequence and that they will mean little to investors and mis-selling may continue as before and with appropriate disclosures! 
 

Under the new regulations, “any graduate” with an experience of five years is eligible to become an investment advisor. Does that by any chance reduce chances of mis-selling knowing the fact that investors are as financially illiterate as have always been?

Another guideline talks about the arm’s length relationship that the advisor is ‘advised’ to maintain with his all other activities. How does SEBI ensure that would happen, and that the investor would stay protected? The disclosure norms laid down do not have any meaning if the investor does not understand what they means and how it could be harmful for him.
 

Read: SEBI: Regulating Investment Advisors
 

Chapter III of the guidelines deals with the “general obligations and responsibilities”, a vague string of guidelines that little to do with actually improving the way financial products are sold in our country. The investment advisor is required to disclose all “conflicts of interests” that would arise. Are advisors being expected to become ethically responsible to do that on their own? Without any framework on how that would be ensured, it remains vague and free to one’s will.
 

When the advisor is asked not to divulge client information, how does the client even find that out? What is the closed loop mechanism in practice here that ensures it would not happen?
 

Read: Investment Advisor Regulation I: SEBI’s ideas are, as usual, far from reality; may increase mis-selling!
 

Another guideline requires the “investment advisor not to enter into transactions on its own account which is contrary to its advice given to clients for a period of 15 days from the day of such advice”. Can he do this after 15 days? And what happens if he does that under those extraordinary circumstances that he has been allowed to do that even within 15 days? The buck, in that case, is clearly passed on to the investor, through mandatory information provided to him 24 hours before taking that action.
 

In any case, these moves would not be able to either curb mis-selling, or help investors about their grievances, since there are no changes on that front and the guideline remains “as applicable”. Second, the only mainline investment product that comes under SEBI is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors. Is there mis-selling of mutual funds? Well, there has to be selling first! Mutual funds are struggling to add assets since SEBI’s August 2009 decision has ensured that interest in mutual funds has totally waned.