The days of the fly-by-night, hole-in-the-wall investment adviser may soon draw to a close.
The market regulator is looking to put in place a mechanism that will stop sharp practices in the world of investment where hordes of unregistered investment advisers have had a free run to rip off ill-informed investors by charging huge fees for dodgy advice wrapped in assurances of pie-in-the-sky returns.
The Securities and Exchange Board of India (SEBI) has floated a consultation paper on a new mechanism to enable investment advisers and research analysts to collect fees from clients through a designated platform that will be administered by a Sebi-recognised supervisory body.
Under the plan, investment advisers will provide details of their designated bank accounts in which fees will have to be paid by their clients. These accounts will be used solely for the collection of fees from investment advisory and research activity, the paper said.
Fees that clients are forced to fork out to investment advisers is a sore topic. There is a regulation that is supposed to protect investors from dubious, light-fingered tipsters. But Regulation 15A of the Securities and Exchange Board of India (Investment Advisors) Regulations 2013 entitles investment advisers to charge fees.
The regulator came out with a circular in September 2020 to tighten surveillance by stating that the payment of fees should be made through a mode that allows traceability of funds. It also specifically barred payment of fees in cash.
But these rules haven’t stopped the proliferation of unregistered investment advisers and research analysts who have breached regulations with impunity. The latest move is designed to slam the brakes on the sharp practices of rogue elements who game the system.
The new fee payment system is designed to “provide clarity to investors regarding the registration status of the entity” that showers them with investment advice and a stack of financial plans apparently tailored to the investor’s profile, gumption and risk-taking ability.
The paper said the regulator is hoping that the new mechanism will “motivate them (the investors) to approach only registered investment advisers and research analysts for all their investment advisory/research service needs.”
The proposed mechanism for fee collection is based on the recommendations of a working group that comprised representatives from the BSE, BSE Administration and Supervision Ltd (BASL) and the Association of Registered Investment Advisors (ARIA).
The plan is to ensure that investment advisers provide clear details about the fee collection system to their clients. It will have to form part of the client agreement.
The caveat in the agreement shall state: “Any payment made outside the specified mechanism shall not be considered as payment towards investment advisory/research services under the Sebi (Investment Advisers) Regulations 2013/Sebi (Research Analysts) Regulations, 2014, and no grievances in this regard will be entertained by Sebi recognised regulatory body or Sebi.”
The consultation paper has asked stakeholders to state whether they would like to see the proposed fee collection system made mandatory or optional for investment advisers and research analysts.
They have also been asked to say whether they would like to see any additional information to be captured in the proposed mechanism to make it more efficient and user friendly. The comments will have to be submitted by September 15.
Curbs on influencers
The regulator has floated a separate consultation paper that seeks to blunt the power of unregistered financial influencers to make sub-optimal or bad investment choices. Sebi has proposed to bar regulated entities from associating with unregistered financial influencers to protect investors.
The regulator proposes to disrupt the revenue model for such financial influencers and bring down the “perverse incentives in the ecosystem”.
The regulator has been alarmed with the manner in which these influencers use social or digital media platforms to influence the financial decisions of their followers. These influencers spout information or advice on investing in securities, personal finance, banking products, insurance and real estate investment.
The regulator said it had come across instances where Sebi-registered intermediaries and regulated entities have started to rely on such unregulated financial influencers to promote their products and services.
The paper says that the financial influencers registered with Sebi, exchanges or the Association of Mutual Funds of India (AMFI) should adhere to a code of conduct and display their registration numbers.
The Sebi regulated entities will be barred from paying any referral fee or trailing commission to these influencers. However, limited referrals from retail clients and payment of fees for such an arrangement by stockbrokers shall be allowed.