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Proposed Mechanism of Fee Collection by IAs and RAs

Finsec Law Advisors

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On August 25, 2023, the Securities and Exchange Board of India (“SEBI”) released a Consultation Paper on the Mechanism for Fee Collection by SEBI Registered Investment Advisers (“IAs”) and Research Analysts (“RAs”) (“Paper”).The Paper seeks to implement a separate mechanism for centralized fee collection by IAs and RAs, which will provide for fee payment through designated platforms administered by a SEBI-recognized supervisory body, i.e., BSE Administration and Supervision Limited (“BASL”).

SEBI has proposed an escrow-based mechanism, wherein the clients will receive a fee payment link for transactions using net banking, debit card or UPI. The supervisory body, i.e., BASL, will issue a Virtual Account number to facilitate fee payments through NEFT,RTGS, IMPS or cheque and any auto debit and mandate requests will continue through eNACH / UPI AutoPay. Further, the fees collected via these methods will be securely transferred to the accounts of IAs and RAs via a payment aggregator or a bank. The Paper also recommends that the IAs/RAs shall provide details of the designated bank accounts in which the fees is received, which will then be used exclusively for collecting fees pertaining to investment advisory or research activities.

These proposals aim to establish a closed ecosystem for RAs and IAs to collect fees which will not only instill confidence in the minds of the investors but will also protect them from being misled by unregistered entities and finfluencers. Additionally, SEBI has suggested that any payment made to RAs/IAs outside the SEBI-recognized mechanism shall not be considered as payment and, hence, no grievances in this regard will be entertained either by SEBI or its recognized supervisory body, BASL.

Our Views:

While the aforesaid mechanism seeks to protect investors, however, unless SEBI provides investors, who have been lured in by unregistered entities, some recourse to approach the regulator, these proposals will merely be regulating the regulated. The proposals put forth in the Paper are not only going to increase the compliance burden for RAs/IAs but will also increase their costs in terms of setting up the payment mechanism and maintaining the payment gateway system.

Further, the Paper does not envisage credit cards as an acceptable mode of payment for the services rendered by RAs/IAs. We believe that there is no logical reasoning behind this since credit cards are only being used by clients to pay advisory fees and no investments are being made through them. Further, restriction on using credit cards to pay advisory services creates a hassle for investors, many of whom presently pay RAs/IAs via credit cards, and would have to switch and adjust to a new method of payment in addition to following the plethora of already existing instructions. The proposed mechanism also requires RAs/IAs to feed in client details onto the designated platforms. It is highly likely that investors will be wary of entering their data onto SEBI’s database and, thus, it remains to see how SEBI plans to address issues of data privacy in this context.

Considering the same, it may be said that the proposals put forth in the Paper, once implemented, will force the investors to be extra cautious while paying for investment advisory or research services. However, if SEBI aims to resolve the issues arising from unregistered entities, it will have to provide investors with a forum to address such issues and, at the same time, raise awareness about the regulated mode of paying financial intermediaries.

You can mail us your queries or comments at Navneeta Shankar.