In the wake of frauds by staff of foreign banks in the past couple of years, the Securities and Exchange Board of India (Sebi) has issued new norms for investment advisors.
Advisors would now have to register with the capital markets regulator. The framework would help regulate various investment advisory services, including independent financial advisors and bank distributors.
"Banks or companies who offer distribution, execution or referral services will be required to offer investment advisory services through a subsidiary or a separately identifiable department or division (Sidd). Such a Sidd would have to be clearly segregated from other activities," stated a Sebi release. Representatives of these entities would have to certified, the release added.
After it floated a concept paper on this last year, Sebi had received 480 responses from financial advisors.
Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors (FIFA), said Sebi's norms were disappointing and would have a negative impact on FIFA's business. "IFAs (independent financial advisors) were earlier mutual fund distributors; they started charging advisory fees after the ban on entry load. However, now, Sebi has said they would have to register as financial advisors, which means they have to let go of their commissions on distribution. This would not make any business sense for them. They should have been put under the exempted category, as was the case in the representation made to us after the draft norms were published," Mehta said.
Advice alone would come under the purview of these regulations, while the regulation of selling products, if any, would be under the purview of product regulators, Sebi added. According to norms, investment advisors would obtain remuneration or compensation only from the client being advised. The regulations provide for a code of conduct, fiduciary duties, record keeping and risk profiling of clients and also deal with the issue of suitability of the advice.
Those exempted from registration under these regulations include people commenting in good faith, in regard to trends in the financial or securities market or the economic situation, provided such comments do not relate to any particular security or investment product. Those advising in exclusive areas like insurance and pension products would also be exempted, provided they are regulated by sectoral regulators. Professionals such as lawyers, chartered accountants, etc, advising on services related to their professions, along with stock brokers and fund managers, have also been exempted, as they are already regulated under separate norms.
