Views on improving the integrity of global capital markets
05 February 2013

India and Singapore Regulators Fill Ethics Void with Strict Financial Rules

Lance Armstrong was stripped of his seven Tour de France titles after admitting that he used performance-enhancing drugs during his cycling career. The shocking part was how he justified his actions:  drug-taking created a “level playing field”. So, if everyone breaks the rules, does that make it fair and justifiable?

People are losing faith in athletes and sports. Fraying trust seems to be the order of the day — and not just sports but in people’s depictions of the finance industry, which is similarly suffering a “trust deficit”.

Where do we begin and how do WE change this? And what is our original role and responsibility? CFA Institute President and CEO John Rogers, CFA, in a recent CNBC article, stresses the need for the finance industry to take personal responsibility for rebuilding investor trust.

Regulators are stepping in to fill the ethical void. Indeed, the Monetary Authority of Singapore (MAS) and Stock Exchange Board of India (SEBI) have resorted to strict rules to regulate the behavior of financial professionals and investment advisers. Singapore’s Financial Advisory Industry Review (FAIR) Panel report was released on 16 January while SEBI recently published new Investment Advisers Regulations. Let’s take a look at the salient points of these regulatory developments.

 MAS Makes FAIR Recommendations

There are currently 62 licensed financial advisory firms (LFAs) in Singapore. To raise the standard of practice in the financial advisory industry, MAS conducted a mystery shopping exercise at the end of 2011 that revealed 30 percent of the products recommended to investors in Singapore were unsuitable and that Singaporeans did not adequately plan their finances. For example, they were under-insured by about 3.7 times their annual income, and four out of 10 people in Singapore did not plan for their retirement or for other contingencies. The FAIR panel, after eight months of intense deliberations, released a series of recommendations under five main focus areas:

  1. Raising the competence level of financial advisory representatives through minimum entry requirements and continuing professional development.
  2. Raising the quality of financial advisory firms through enhanced requirements on minimum base capital, continuing financial resources, professional indemnity insurance, and dedicated compliance arrangements.
  3. Making financial advising a dedicated service by recruiting representatives whose professional focus is primarily on their advisory role with no conflicts of interest with their business and better accountability and disclosure to customers.
  4. Lowering distribution costs by harnessing competitive market forces rather than banning commissions.
  5. Promoting a culture of fair dealing by requiring all financial advisory firms to adopt a balanced scorecard framework and ban all product specific incentives.

The FAIR panel has submitted its recommendations to MAS, which will consult the industry before adopting these recommendations. With the increased cost of compliance, training, administration, and the new reserve capital requirements, the industry expects some change in business models or consolidation of smaller boutique firms. Question remains whether FAIR will provide an opportunity to educate investors and whether the way advisers recommend products to clients will eventually change to “put the client first”.

SEBI Investment Adviser Regulations

After two consultation papers issued by SEBI in 2007 and 2011 seeking stakeholder opinions relating to the framework for the regulation of investment advisers, the much-debated regulations will come into force in April 2013. CFA Institute, along with the Indian Association of Investment Professionals (IAIP), provided feedback in Nov 2011 to support SEBI’s attempt to protect investors and eliminate mis-selling of financial products in India, where financial literacy is relatively low.

The main highlights of this regulation:

  1. Registration of investment advisers: Individuals acting or holding themselves out as an investment adviser is required to register with SEBI. There is an exhaustive list of exempted persons which includes advisers exclusively in areas like insurance and pension products provided they are regulated by sectoral regulations.
  2. Eligibility criteria for registration: Investment adviser regulations mandate different requirements and thresholds for registrations, including raising the bar for minimum qualification and capital adequacy to act as an investment adviser.
  3. Investment adviser obligations and responsibilities: Apart from stipulating strict risk profiling, suitability, and “Know Your Customer” requirements, investment advisers are held to the highest level of ethical and moral standards to protect clients. They must act in a fiduciary capacity towards clients and disclose conflicts of interests arising from various other activities carried out by the investment adviser that may compromise the investment adviser’s objectivity and independence. The new regulations prohibit an investment adviser from receiving compensation, in any other form, from any person relating to the underlying securities or investment products other than the client being advised by the investment adviser.

SEBI appears to be trying to strike a balance between over-regulation and the protection of investors in India. The new regulation, to a large extent, attempts to regulate the unorganized sector of investment advisers in India. The challenge lies in implementing this regulation and creating a trust-worthy cadre of financial advisers.

Is Regulation the Answer?

In making a high-level comparison between FAIR recommendations in Singapore and investment adviser regulations in India, a common theme emerges — an attempt on the part of regulators to build an investor-friendly finance industry in their respective markets. Both regulators are raising the bar to enter the finance/investment adviser industry. And both are increasing the focus on disclosure and compliance.

While the Indian regulators have excluded the insurance and pension funds from registration, the Singapore recommendations encompass all financial institutions including banks, life insurance companies, capital market services, license holders, licensed financial advisory firms, and insurance broking firms. Both have different ways to deal with commissions. Singapore is taking the balanced scorecard route while India prohibits receiving payment from anyone other than the client being advised. Both India and Singapore are striving for financial/investment advisers to act in the best interest of the investor. Dedicated compliance officers are a requirement to ensure adherence to regulations. Financial advisers may need to restructure their administrative and IT systems to comply with the requirements and may incur transition costs as a result. However, regulators expect these changes to increase confidence in the industry, contributing to increased demand for financial advice.

What is the role of the investor? Investors should augment their screening process to seek out dependable, good quality advice and choose advisers who adhere to the highest standards of ethical conduct. The easiest way is for investors to look for firms that adhere to the CFA Institute Asset Manager Code of Professional Conduct. By adopting this code, firms make clear their commitment to adhering to the highest ethical standards and putting client interests first.

That’s where it begins — individuals taking personal responsibility. Let’s make a change!

On that note, I was happy to read that Novak Djokovic, who recently won the Australian Open tennis championship and a lifelong cycling fan himself, recently slammed embattled Lance Armstrong’s long-delayed doping admissions. Novak Djokovic also said he has lost faith in cycling and in all of the big cycling champions.

As cliché as it may sound, I come from the land of Gandhi who was a true believer in not losing “faith in humanity. Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty”.

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About the Author(s)
Padma Venkat, CFA

Padma Venkat, CFA, is former director of capital markets policy at CFA Institute. She is responsible for promoting CFA Institute standards, policies, and positions in the Asia-Pacific region.

5 thoughts on “India and Singapore Regulators Fill Ethics Void with Strict Financial Rules”

  1. Biharilal Deora CFA says:

    At the end, Regulators are trying to protect people from mis-selling but event with the strongest of regulations, i would urge caveat emptor while buying a financial product or service. The individual code and integrity is something which one has to adhere to oneself

  2. Nitin says:

    I feel the regulations, are re-freshing and will help movement towards Fee Based Advisory Service. The need to upskill advisors and the use of technology in scaling growth of practices, is the way to go. Automation of Services and easier data availability, and choice of products, will empower customers.

  3. Mahesh B P,CFA says:

    I have couple of questions:
    1.Will CFA be recognized as an acceptable minimum qualification ?
    2. Willl NISM recognize CFA as an acceptable certification ?
    3. Can an advisor registered as an individual , in addition to providing advice also execute the advice (i.e place the trades ) on behalf of the client with client’s ascent provided that the advisor gets his fee only from the client has no incentive from the broker for directing the trades?

  4. My thoughts and relevant points on the regulations are below : Feel free to comment/answer

    Here are a few highlights of the regulations and their likely impact

    Definition of Financial Planning : According to the new Investment Advisers (IA) regulations “financial planning shall include analysis of clients’ 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 is fair and reasonable.
    What is the definition of fair and reasonable fees? Will it be based on assets or hours or number of of people in a family? This can have widespread implications and undesired effects as well as conflicts on what is the price for quality advise. Will each Investment Adviser sign an annual compliance stating he has adhered to the code or otherwise remains to be seen.
    Risk profiling and Suitablity : 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 the product and agreeing to the risk assessment and advise. Whether this becomes paperwork like typical insurance examples of 6% and 10% remains to be seen.
    Other issues : A 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 advise fees. Professional bodies including SEBI need to put a system in place where a potential client can check the disciplinary history for advisors.

    Overall, this regulation is meant to avoid mis selling and making advisors 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

  5. Padma Venkat, CFA says:

    Thank you for your comments. With the support of IAIP (CFA Society of India), we will be following the situation closely to determine the effect of this regulation.

    We are keen to hear from our members whether this new regulation will impact their business models.

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