Fiduciary responsibility. According to SEBI, the adviser will have to act in fiduciary capacity towards his clients. He will have to disclose all existing and potential conflicts of interests. Further, he is not to divulge any confidential information about clients without taking prior permission, unless such disclosures are required by law. A fiduciary duty is a legally binding relationship between two or more parties and requires the highest standard of care by advisers towards clients. Again, in tune with global regulatory practices.

Disclosures. SEBI guidelines state that an adviser will have to disclose all material information, including his business, disciplinary history, terms and conditions on which advice is offered, and affiliations with other intermediaries. Before recommending a security, he will have to disclose all commissions and rewards, if any, that he will receive. This will arm consumers with information, based on which they can ask smarter questions like: do you have any real reason to sell this new fund offer (NFO) and not an existing scheme — is it because you’re getting 6 per cent commission on the NFO and 2.25 per cent on an existing one?

These four issues are major regulatory concerns in the intermediation space across the world today. To that extent, with SEBI’s draft investment advisers regulations, India is joining the globalisation of intermediary regulation, as it is in the US, Australia, New Zealand and UK. But this is only the first step.

The bigger issue when seen from the consumers side is one of regulatory arbitrage. From the household’s perspective, the financial services landscape is one unit that helps it meet financial goals. The household has need for, say, investment advice. It goes to an intermediary. That intermediary has an option to sell either securities and mutual funds (under SEBI’s ambit) or insurance products like ULIPs (under Insurance Regulatory Development Authority). If the intermediary does not have similar guidelines while selling high commission insurance products, the adviser could manoeuvre investor money away from funds into ULIPs — he won’t have any fiduciary responsibility, won’t be answerable to any SRO, won’t need to declare commissions (tell the household that he’s getting a 40 per cent commission unlike 2.25-6 per cent in funds).

... contd.