INSUBCONTINENT EXCLUSIVE:
By
Sandeep ParekhSebi came out with an innocuous circular a few days back, imposing some well-meaning reforms in investment advisor
The circular is a good example of why a regulator should always expose any changes in the law with a proposal before making it final
There may be a few rare exceptions where it is important not to do so
For instance, where a new law would create massive lobbying efforts, it may be best to keep it as a surprise
Even then, public feedback should be accepted post publication
But in almost all other cases, the discipline of checking with the market would reduce both unintentional error and allow second-order
thinking.
The short two-page circular sounds so well intentioned
But the piece is an important message to the regulator about how to draft a new law and how a few words written without good process can
To recall, investment advisors are a new breed of professionals recognised less than a decade back
They are a subcategory of what was earlier captured under the portfolio manager regulations
Their work was seen as a contrast to distributors
While distributors pushed products as sales agents of manufacturers like mutual funds, investment advisors were seen as an agent of the
Thus, advisors can take no money from the mutual fund and are fiduciaries of the investor providing a low-conflict model.
The five changes
are: firstly, no free trial for services of advice
Second, no part payment should be accepted from the client
This profiling should be followed by a consent obtained through a registered email or physical document
Fourth, barring cash deposits and payment through payment gateways, while allowing only cheques/NEFT/RTGS/IMPS/UPI, as the latter category
generate on second-order thinking
Regarding the first point, the mischief sought to be cured is that people are given free trial runs without doing an assessment of the
A trial run is a great way for the investor to assess the quality of the advisor, and thus, banning it is counterproductive
To address the mischief, what ought to have been done was to say that trials cannot be offered without a full risk assessment
Barring a trial is a self-goal in investor protection and solves the mischief sought to be cured by going to the original cause rather than
is prescribed, perhaps to avoid charging clients on the front side
But this is contrary to practice in nearly every profession
Few lawyers will charge fees only at the end of, say a year, and few clients will agree to pay 100% upfront
It will also have the unintended consequence of the advisor charging the full annual fee upfront, thus disrupting the business model, which
is already quite precarious
Clients would also end up being upset.
On the third prescription, seeking consent through email or physical form will drag the industry
Today, many, if not most, financial relationships start online without any email exchanged or paper being signed
With KYC happening across industries (not just within the securities industry), even the last vestige of paper will be eliminated early this
The rule will create pointless disruption for robo advisors, which offer a low-cost and automated advice to clients, as they usually sign up
clients online and complete their assessment in a few hundred rupees
Imagine if the law was to extend to Google or Microsoft software
Modern financial transactions like software purchases are done via click-through.
The fourth mandate is somewhat strange
It seems to bar payment gateways, even banking ones or wallets like Paytm
It bars credit cards and debit cards and a host of highly-regulated systems of payments with as good an audit trail as possible
This will be completely pointless disruption, besides being anti-competitive
This should be immediately revoked and if cash is the stated enemy, that alone should be barred.
Finally, asking the advisor to disclose
investor complaints on their website may appear fair, but there is no requirement to have a website for advisors
This will be a whole new set of cost for small and rural-oriented advisors who are not equipped to set up a website
Sebi should offer to host the information on their own site for such advisors.
Overall, while more regulations may appear to be fair,
applying them across the board acts as entry barriers and elitifies what ought to be a grass-roots profession
The regulator needs to adopt cost-benefit analysis and also put up drafts of circulars before implementing them
This is not just best practice, but also a minimally good practice as can be seen from this circular and its effects.