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Investment Adviser Regulation & Certification

Category : NISM-Series XA

The Securities and Exchange Board of India (SEBI) approved the SEBI (Investment Advisers) Regulations, 2012 in its board meeting on August 16, 2012, with a view to standardize the registration and regulation for investment advisers.

SEBI's Investment Adviser regulation has come into effect from April 21, 2013 and an adviser is required to get registered with SEBI as an Investment Adviser (IA) within 6 months, i.e. before October 20, 2013. From October 21, 2013 no person is eligible to provide financial advice to their clients for a fee unless the person is registered as an IA or has applied to be registered as IA. Hence, it is now mandatory to have an investment adviser registration for practicing financial advisery profession.

SEBI registered Investment Advisers will have to comply with a host of rules like maintaining client records for five years, risk profiling, copies of agreements with clients, appointment of auditors, among others.

Individual Financial Advisers (IFAs) have to pay a non-refundable amount of Rs. 5000 as application fee and Rs. 10,000 thereafter for getting Investment Adviser Certification from SEBI. Corporates have to shell out a much higher fee of Rs. 1 lakh as registration fee. Corporate advisers need to have a net worth of Rs. 25 lakh while individuals Rs. 1 lakh.

Investment Adviser Certification

Following the SEBI's objective, NISM has launched a certification meant for those who register with SEBI under SEBI Investment Adviser Regulations. The certification is called NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination which will be valid for three years. NISM will launch Level 2 of this certification as well in due course of time.

An adviser will be required to pass both the levels i.e. NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination and NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination, to comply with SEBI (Investment Advisers) Regulations, 2013. The Level 1 certification consists of 100 questions of 1 mark each which should be completed in 2 hours. The passing score for the examination is 60%.

The course covers areas like the various investment vehicles in the market, taxation, regulations, insurance planning, investment risks, measurement of returns and touches upon the basic concepts of financial planning.

Eligibility to be registered as an Investment Adviser with SEBI

All individuals (including financial planners), body corporate and partnership firms, which provide investment advice for monetary consideration along with anyone who holds himself as an investment adviser will need to be compulsorily registered and regulated under these regulations and will have to use the words "investment advisers" in their name.

As per SEBI regulations, an investment adviser registered with SEBI should have a professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association.

If applicant is Graduate, he/she must have five years of experience in finance profession or certificates in any of the following domain - financial planning, fund, asset, portfolio management or investment advisery services from NISM or any other recognized body.

Investment Advisers also need to have a certification in financial planning either from NISM, FPSB or any other institute or stock exchange if such certification is accredited by NISM.

 

An Investment Adviser (IA) has been defined as one who offers advice on buying, selling and dealing with securities and investment products for a consideration. An Investment Adviser (IA) is required to act in a fiduciary capacity towards their clients. Simply put, an IA is someone who uses a professional and client-centric approach in managing or advising clients on investments.

Investment advice given without any financial charges/fee through the media at large and widely available to the public shall not be considered as investment advice.

The institutions (including banks), providing distribution, execution or referral services, will need to offer investment advisery services through a subsidiary or a Separately Identifiable Department or Division (SIDD) and this entity will have to be segregated from other activities. Also, the representatives of body corporate or a bank who provide advice on the institution's behalf need to be qualified and certified.

It has been mandated that the investment adviser will not charge any fee from any individual/entity other than his client. Further, banks and other firms in this business will need to disclose to the clients being advised about any remuneration/fee received by it and any of its associates for the distribution, referral or execution services.

The SEBI has exempted certain persons from registration under these regulations:

  • Persons giving general comments on trends in the financial or securities market or the economic situation given that these comments do not specify any particular securities/investment product.
  • Persons providing advice exclusively in areas like insurance and pension products provided they are regulated by sectoral regulators.
  • Professionals such as lawyers, chartered accountants etc., providing advice incidental to their professional services.
  • Stock brokers, sub-brokers, portfolio managers and merchant bankers registered with SEBI providing investment advice incidental to their primary activity; however, they have to comply with obligations such as acting in fiduciary responsibility, risk profiling etc.
  • AMFI registered distributors providing investment advice incidental to their primary activity.
  • The fund manager of a mutual fund or alternative investment fund.

Some Clarification Required

Financial Planning: According to the new Investment Advisers (IA) regulations financial planning shall include analysis of client's current financial situation, identification of their financial goals, and developing and recommending financial strategies to realize such goals.

FPSB India defines Financial Planning on its website as a process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement.

Now clearly the regulatory definition makes one think if it also includes advice relating to taxation, insurance, retirement, estates and wills. Does that mean, a financial planner can still advise its client on all these aspects and charge a fee without coming under these new regulations?

Code of Conduct: Interestingly enough, the Investment Advisers (IA) Regulations also prescribes a separate Code of Conduct for Investment Advisers which apart from honesty and fairness, also talks about fair and reasonable charges. It says an investment adviser advising a client may charge fees, subject to any ceiling as may be specified by SEBI, if any. The investment adviser shall ensure that fees charged to the clients are fair and reasonable.

What is the definition of fair and reasonable fees? Will it be based on assets or hours or number of people in a family? This can have widespread implications and undesired effects as well as conflicts on what is the price for quality advice.

Risk profiling and Suitability: The regulations make it mandatory to carry our initial and periodic risk assessment for all clients including their ability and willingness to take risks.

Suitability is defined as a recommendation or transaction entered into which meets the client's investment objectives; is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance and is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.

This provision will require the clients to at least sign a declaration of understanding of the product and agreeing to the risk assessment and advice. Whether this becomes paperwork like typical insurance examples of 6% and 10% remains to be seen.

Other issues: An Individual Applicant also needs to produce apart from other things, details of any disciplinary actions/other offenses against them in last 5 years and a copy of CIBIL report. They also need to submit a declaration that they shall not obtain any other remuneration from clients except advice fees. Professional bodies including SEBI need to put a system in place where a potential client can check the disciplinary history for advisers.

Overall, this regulation is meant to avoid mis-selling and making advisers responsible and liable to clients on what they advise. How many individual investors will benefit out of the regulations remains a question that only time will answer?

Around 15 out of the 30 members of Financial Planners Guild, India (FPG) are in the process of registering with SEBI. FPGI has sought clarity from SEBI on the definition of arms length relationship and whether distribution services can be carried out through a family member having ARN.

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