June 17, 2013: On January 21, 2013, the SEBI notified the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“IA Regulations”) to check the number of entities handing out advice to investors in an increasingly sophisticated financial market.
The IA Regulations require any person (bank, non-banking financial company, corporates, and individuals) who wants to act as an investment advisor to first obtain a certificate of registration from the SEBI. Once registered, an investment advisor must make various disclosures to the SEBI, including the fee received for advice and any conflicts of interest. To further address the issue of conflict, investment advisers will also have to separate their advisory services from other activities. An important provision of the IA Regulations is that an investment adviser cannot enter into transactions on its own account contrary to the advice given to clients for at least 15 days after the advice is given. The IA Regulations exempt a few individuals from registration including insurance agents giving investment advice solely on insurance products.
The IA Regulations are a step in the right direction, but there are still some key issues that need resolution, including the commission-based sales of financial products. The exclusion of insurance products from regulations that seek to protect investors is also a worrying loophole. Until there is an effective way of segregating the advisor end from the sales end, the regulator will also find it difficult to control mis-selling in an ever-increasing retail market. Advisors can be flippant, often failing to tailor the advice to the specific financial needs and abilities of a particular customer.
From an investor’s point of view, the best way of taking your financial future and security in your own hands is to take investment advice with a pinch of salt, without relying exclusively on regulatory protection. For now, self-education and attention to paperwork at the time of taking a particular financial product may be the best approach to any investment.
(Deeksha Singh is part of the faculty on myLaw.net.)
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