Recently, the Securities and Exchange Board of India (Sebi) has taken significant steps to regulate and streamline the functioning of Registered Investment Advisors (RIA). These measures aim to enhance transparency, protect investors, and promote a cleaner, ethical, and client-centric financial advisory industry.
One of the prominent circulars, issued on April 5, 2023, focuses on the advertisement code for registered IAs. Abhishek Kumar, a Sebi RIA and founder and chief investment advisor of SahajMoney, a financial planning firm, notes that the circular addresses various aspects, including forms of communication, disclosure, and advertisement prohibitions. Kumar emphasizes Sebi's intent to clamp down on misleading ads by registered IAs. "The regulator aims to ensure that deceptive advertisements from registered IAs do not mislead investors," says Kumar.
Regulation Of Execution Only Platforms (EOPs): Many 'Execution Only Platforms' (EOP) operated under the registered IA license but offered transaction services to investors who were not their clients. These investors did not have recourse regarding these transactions under IA regulation. To curtail that, Sebi issued a circular on June 13, 2023, effective September 1, 2023, primarily asking these EOPs to either register with the stock exchanges or with the Association of Mutual Funds in India (AMFI) for offering these services within three months of the effective date.
By imposing registration requirements, Sebi takes proactive steps to curtail the operations of EOPs within the regulated space. This move ensures that these platforms adhere to defined parameters and comply with regulations. Importantly, it signifies Sebi's commitment to enhancing investor protection. Investors can now have confidence in a structured process for addressing concerns or disputes related to transactions on EOPs.
A recent circular on September 20, 2023, focuses on enhancing the efficiency of the grievance redressal process for investors. It involves linking the SCORES platform to the Online Dispute Resolution (ODR) platform, applicable to registered IAs and other market intermediaries. "Sebi aims to make the investor grievance redressal process more efficient through technology integration," says Kumar.
In a consultation paper released on August 25, 2023, Sebi proposed restrictions on the association of its Registered Intermediaries (RI)/ Regulated Entities (RE) with unregistered entities or finfluencers. Sebi's move intends to sever the financial lifeline of these finfluencers, many of whom earn through perverse incentives like referral fees from Sebi RI/RE.
Simultaneously, in another consultation paper issued on the same date, Sebi advocated for a closed ecosystem in the Sebi-registered IAs and Research Analysts (RAs) fee collection mechanism. Sebi's rationale is grounded in the belief that this system would ensure investors' payments reach only registered IA and RA, safeguarding them from dealings with unregistered entities.
As articulated in these circulars and consultation papers, Sebi's overarching position is to eradicate unregistered entities by disrupting their revenue models. The primary aim is to shield investors from potential exploitation by such entities. However, the efficacy of these proposals and directives in achieving their intended objectives remains to be seen over time.
"Sebi is working towards eliminating perverse incentives and creating a clean industry," says Renu Maheshwari, CEO of Finzscholarz Wealth Manager.
Performance Validation Agency (PVA): Also, social media is inundated with many Sebi RI, including IA and other entities, making inflated claims of their performance to attract more clients but effectively misleading the investors. To control this phenomenon, Sebi, on August 31, 2023, issued a consultation paper on the Performance Validation Agency (PVA). The proposal is to create an independent body to validate the claims of RI.
Maheshwari acknowledges the regulator's efforts in creating a clean and client-centric industry. However, she points out that the compliance issues, though essential, are causing some strain on advisors. "While the regulatory landscape poses challenges, I am optimistic about the industry's future. Sebi's working groups are crucial in harmonizing regulations for a flourishing financial advisory sector," says Maheshwari.
All registered investment advisors can be segregated based on their activities. One group of advisors provides financial planning services; another group offers financial planning and investment advisory services; and the third group operates in trading calls and derivatives. Direct equity trading and Future and Options trading activities are fraught with risks.
"Most orders and complaints have been for the third category of advisors. The complaints analysis shows no complaints against financial planning advisors. A corrective regulation, though, affects all the participants equally. We have reasons to believe that Sebi will be looking at relaxing a few of the hurdles the advisers face," she says.
For the common investors, Sebi's recent moves hold significant implications that revolve around enhanced protection, transparency, and reliability in financial advisory services. With a focus on curbing misleading advertisements, investors can expect a more trustworthy environment where the information they receive is accurate and unbiased. The regulation of Execution Only Platforms (EOPs) ensures that investors have recourse in case of transactions that fall outside the purview of the Sebi IA Regulation, offering an added layer of security.
Integrating technology for grievance redressal through the SCORES platform aims to streamline the resolution process, providing investors with a more efficient mechanism to address concerns. Moreover, the proposals to restrict associations with unregistered entities and establish a closed ecosystem for fee collection contribute to building a financial advisory landscape free from perverse incentives and unlisted entities. In essence, these regulatory measures align with the ordinary investor's interests, fostering an environment where financial decisions can be made with greater confidence and trust in the integrity of the advisory services received. Let's wait and watch.