Fintech Policy Roundtable on SEBI’s Investment Advisers Regulation

23 Jan 2018

India FinTech Forum had recently organised a Fintech Policy Roundtable at ISME ACE in Mumbai on 22nd January, 2018. The objective of this roundtable was to discuss the latest consultation paper from SEBI on “Amendments/ Clarifications to the SEBI (Investment Advisers) Regulations, 2013“. The event was moderated by Mr. Sachin Seth, Partner – Financial Services Advisory | Digital, Fintech & Innovation Leader at EY and was attended by 65 participants including CXOs of various robo-advisory and financial services firms. EY collated the points discussed during the Fintech Policy Roundtable and these points were shared with SEBI.

The investment space is expected to see significant disruptions with robo-advisors, algorithmic trading etc. Also interesting technology developments like Aadhar-based eKYC, UPI, eNACH will change the way the wealth management services are offered. Hence, it is important to make sure that the correct regulatory framework is in place to foster innovative solutions using the latest technologies.

Apart from the specific points related to the consultation paper, the attendees also discussed regulatory steps required to ease mutual fund distribution via online channels (for both MFDs and RIAs).

Key points discussed during the roundtable are:

1. The Consultation Paper states that, “Clear segregation between the two activities of providing investment advice and execution of investment transactions”. We will need clarity from SEBI on the word “execution”. Does this mean investors have to visit two different entities to get their investments done? RIAs should be able to provide platforms for “execution” in direct plans.

2. The paper prohibits immediate relatives of a distributor from advisory. It does not seem fair to a genuine professional who has a right to his career choice.

3. The paper states that banks and firms who are RIAs, shall not provide any distribution services, either directly or through their holding company or associate/ subsidiary company. Are companies with common directors or common significant shareholders allowed?

4. Further clarity is required to understand if RIAs cannot distribute financial products, will this restriction be applicable to other financial products such as insurance and loans?

5. SEBI would like Mutual Fund Distributors (MFDs) to ensure the principle of ‘appropriateness’ of products to the client. However, MFDs are not allowed to provide ‘advice’. Hence, the word ‘appropriateness’ must be defined unambiguously. Will basic risk profiling along with automated goal-based investment recommendations qualify as “appropriate” or “advice”? To improve access to good quality advice at low costs, technology platforms developed by MFDs should be allowed as long as they do not charge additional fees and provide recommendations in the best interest of investors.

6. It is recommended that robo-advisors and/or algorithm based fintech players be governed under separate regulations (not under traditional RIA or MFD). They must be allowed the flexibility to decide their business model. If required, the algorithms of these firms can be monitored. They should be allowed to do both advisory and distribution of MFs for greater financial inclusion. The free market will create enough competition to bring down the cost of distribution while also providing fintech firms a chance to create long-term sustainable businesses.

7. Customers with low ticket investments (eg. Rs. 500 one-time investment in a debt fund) may be serviced through MFD led revenue model as paying a separate advisory fee can be costlier for the investor. A similar experiment to separate advisory from distribution in UK has resulted in greater advice gap.

In India, the penetration of mutual funds is low and the regulator must create an environment for innovation in digital distribution of MFs. A summarised version of the above points discussed at the Fintech Policy Roundtable was sent to SEBI.

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