SEBI Floats Fourth Discussion Paper On Segregating Advisory And Distribution Services
SEBI has sought public comments on its proposals to separate advisory and distribution business of investment advisers by Jan. 30.
The market regulator made a fourth attempt to remove the conflict of interest that exists for an entity that distributes an investment product and advises on the same.
The Securities and Exchange Board of India released a fresh discussion paper following investor complaints over exorbitant fees charged by investments advisers, false promises and mis-selling of products. The regulator had come out with similar consultation paper in October 2016, June 2017 and January 2018.
SEBI has sought public comments by Jan. 30, 2020.
Here’s what the fourth discussion paper propose…
Client-Level Segregation
The market regulator proposed a clear segregation between the two services provided to clients. Non-individual entities within a group can’t accept the same client for offering both advisory and distribution services.
A client can either be an advisory client where no distributor consideration is received at the group level or a distribution services client where no advisory fee can be collected from the client at the group level.
Group companies will be as per the provisions of the Companies Act 2013. Similar reference will be applicable for limited liability partnerships.
SEBI also proposed that individuals who are registered as investment advisers can’t directly provide both advisory and distribution services in financial products or through their family members, which the regulator defined as spouse, dependent children and dependent parents.
Earlier, individuals were not allowed to offer distribution services.
According to SEBI, PAN card of each client should be control record for identification and client-level segregation.
Implementation Of Advice
While providing implementation services to advisory clients, no consideration should be received either directly or indirectly at investment advisers’ group/family level.
The services will be provided through direct schemes/code in the market, and the adviser cannot receive commission or referral fees from the distributor of services for execution of his advice.
Fees Chargeable
Investment advisers will be allowed to charge fees based on the assets under advice—aggregate net asset value of the securities or investments for which advice has been rendered and either executed by the adviser or executed by other service provider.
Fees shall be charged on the underlying value of the assets under advice.
The maximum fees to be charged would be 2.5 percent of the assets under advice per annum per family across all schemes, products or services. The maximum fixed fees that can be charged is Rs 75,000 per annum per family across all schemes, products or services. Advance fee charged cannot exceed two quarter of the fees.
Net Worth Criteria
The regulator proposed a net worth criteria of Rs 10 lakh for individual registered as investment advisers from Rs 1 lakh at present. The net worth criterion is Rs 50 lakh for non-individuals against Rs 25 lakh now.
Existing investment advisers will have three years to transition.
Any individual registered as investment adviser whose number of clients exceeds 150 or assets under advice exceeds Rs 40 crore will have to compulsorily re-register as non-individual investment adviser.
Other Proposals
- Investment advisers are required to get the terms and conditions signed by clients along with their consent, in case of charging of fees.
- Will have to get annual audits to comply with the segregation of advisory or distribution services.
- Maintain record of conversation from the first meeting with the clients either in form of telephone recordings, emails, SMSs, physical record signed or other legally verifiable records.
- SEBI listed the qualification required for people associated with investment advice.
- Investment advisers will not be allowed to seek power of attorney for auto execution of investment advice of clients.