In its recommendation to Securities and Exchange Board of India (SEBI) on the latest consultation paper, Financial Planning Standards Board India (FPSB India) has suggested that complete segregation of ‘advice’ and ‘distribution’ would not be feasible, especially in the individual category.
While FPSB suggested SEBI that there should be segregation between the activities of ‘advice’ and ‘distribution’ to prevent conflict of interest, suitable disclosures regarding the dual functions of advisory and distribution should suffice. This, according to FPSB, would be in the best interests of investors rather than an absolute segregation of advice and distribution. The government of India’s Financial Sector Legislative Reforms Commission (FSLRC) report has also recommended that disclosure of conflicts of interest by intermediaries would go a long way in ensuring consumer protection. “One of the best ways to ensure good consumer protection is to align the incentives of financial service providers with those of consumers and ensure that in case of a conflict, the interests of consumers take precedence. The draft Code incorporates this principle of prioritising the interests of retail consumers over those of the provider. It also requires advisers to inform retail consumers about any conflicted remuneration they stand to receive, which may influence the advice being given to the retail consumer. The regulator may, in addition, specify the nature, type and structure of benefits permitted to be received by an advisor for a particular financial product or service,” states the FSLRC report.
On the proposal which requires mutual fund distributors to ensure the principle of “appropriateness”, FPSB noted that in order to ensure such a thing, a distributor will have to know about the client and his/her goals, needs, profile etc., which essentially forms the basis of investment advice.
According to FPSB, the proposals if implemented in the current form may lead to possible detrimental consequences for investors as they are unlikely to go to two completely distinct entities for advice and products. “A suitable validation by virtue of a qualified survey from the financial consumers should be sought on whether they would like to approach separate entities/individuals to get advice and then to execute transactions. Investors in India need a lot of handholding at every stage viz. both for advice and execution, and complexity and cost consideration may tilt their financial behavior to the execution side without seeking professional investment advice,” said Ranjeet S. Mudholkar, Vice Chairman and CEO, FPSB India.
According to FPSB, the requirement that completely independent entities should provide advice and distribution separately is likely to impact the industry including the practices of the Registered Investment Advisers (RIAs), thus impeding its growth in India.
It notes that SEBI’s recent proposals to amend the Investment Advisers (IA) Regulations is a step forward, and with some modifications it would go a long way in changing the way investors could access personal finance advice.