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SEBI Circular on Investment Advisers - A Step Back?

Finsec Law Advisors

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On December 27, SEBI issued a circular imposing additional measures to regulate the conduct of investment advisers (IAs). With effect from January 01, 2020, IAs will be permitted to provide investment advice only after i) completion of risk profiling of clients, and ii) receipt of consent of such clients on the completed risk profile through registered e-mail or physical document. According to the circular, IAs will be prohibited from providing any product or service on a free trial basis, and no advance payments or part payments will be allowed to be accepted.

Further, client payments for services of IAs will be accepted only through crossed cheques / demand drafts or direct credit through NEFT/RTGS/IMPS/UPI. Cash deposits are expressly prohibited. However, the circular appears to prohibit payments through online gateways and even debit and credit cards. There is no rationale for prohibiting such modes of payments since the above methods provide equally good audit trails as regular banking channels.

In our view, the above restrictions are regressive and will not achieve the purpose sought. To address the concern of lack of proper risk assessment in case of free trials, it is inappropriate to completely ban free trials, since they are useful ways for investors to assess the quality of the IAs. We believe a mandatory risk assessment before services are offered on trial basis would have been adequate. Further, not permitting part payments will hurt both investors as well as IAs, as few professionals work with 100% back-ended payments.

Additionally, in order to promote transparency, IAs will now be required to prominently disclose the status of resolution of complaints in the prescribed format (without scrolling) on the homepage of their websites / mobile application on a monthly basis, which would also include the reasons for pendency of complaints, if any. The disclosures shall be made within 7 days of the end of previous month. As such a requirement may take up a substantial portion of the screen space especially in case of mobile applications, we believe a prominently displayed link to the complaints’ page would have been more appropriate.