SEBI favours self regulation model for wealth managers

SEBI favours self regulation model for wealth managers

In its new set of rules for an estimated USD-1 trillion wealth management industry, SEBI is planning to set up an intermediary regulatory body with representation from among the wealth managers themselves.

In the proposed self-regulatory model, the market watchdog will put the onus entirely on wealth managers for compliance to the regulations and the new entity to be created under Sebi's guidance would work as the first-stage regulator as also market development authority, a senior official said.

The decision to set up a self-regulatory organisation for wealth managers has been taken with a twin objective of regulating them without hampering the growth prospects of this burgeoning segment of financial services sector, he added.

The SRO model, where the wealth managers or investment advisors would be asked to develop a stringent code of conduct in consultation with Sebi, would be complemented with stern penalty measures for erring entities.

Sebi would provide an initial funding of Rs 10 crore for setting up of this SRO for wealth managers, after which the industry would have to pool in their own resources.

The proposed move is in line with similar measures earlier taken for mutual funds and merchant bankers, whose industry bodies AMFI (Association of Mutual Funds in India) and AMBI (Association of Merchant Bankers in India) serve as first-stage regulators.

The new body would also serve as a medium for Sebi to implement its various initiatives for the wealth managers.

The new rules would cover entities offering wealth management or investment advisory services across various asset classes irrespective of the different financial markets.

These would include stocks, commodities, fixed deposits, derivatives, insurance, mutual funds, private equity, pension funds as also alternative investment products such as funds investing in art works, antiques, coins and stamps.

For past few months, Sebi has been in consultation with the government, RBI and other financial regulators for framing a new set of rules for the wealth managers.

Given the size of the industry, and therefore a higher risk of large-scale frauds or manipulations, the new rules would also allow Sebi and RBI to impose strict penalties.

Although there are no official figures for it, the size of wealth management industry is pegged at about USD 1 trillion -- nearly double the size a couple of years ago.

While RBI and Sebi would be primarily responsible for compliance of the rules, help would be sought from other regulators, namely commodity regulator FMC, insurance watchdog IRDA and pension fund regulator PFRDA, whenever needed.

The proposed rules are also being discussed by the Financial Stability and Development Council (FSDC), a high-level regulatory body chaired by Finance Minister.

The need for new norms was felt after an estimated Rs 400-crore fraud allegedly perpetuated by a relationship manager at Citibank and initial probe into the matter pointing towards various loopholes in existing regulations.

Subsequently, the government roped in all the financial sector regulators to formulate the all-encompassing and stricter wealth management guidelines, given the huge surge in the size of assets managed by them.

The new set of rules would collate all the existing practices and regulations for wealth management space from the different regulators and thereafter seek to do away with the loopholes, if any.

Wealth managers, who mostly act as investment advisors for HNIs, are currently regulated by different regulators as per the sectors in which they are offering their services.

However, there are no comprehensive rules to regulate the wealth managers for services across various sectors such as banking, markets, insurance, commodity and pension funds.

After the Harshad Mehta scam in 1992, RBI banned banks' portfolio management services. Since then, banks are limiting their wealth management business to advising their wealthy clients without taking custody of the capital or assets.

Sebi does not allow brokers to insist on PoAs from their clients and might suggest the same for bankers and others.

As such, the portfolio management services in the capital market are regulated by Sebi, but these regulations do not cover asset classes such as fixed deposits and other banking products, insurance, commodity and pension funds.

SEBI modifies norms to appoint internal auditors

SEBI has modified the norms for appointment of its internal auditor, a move that enabled the capital market regulator to retain chartered accountants firm Chokshi & Chokshi for two more years.

The decision to give a two-year extension to the firm was taken at the last Board meeting of the Securities and Exchange Board of India (SEBI).

The earlier guidelines provided that the SEBI could hire an accounting firm for a maximum term of three years.

Chokshi & Chokshi were appointed as the internal auditors of SEBI for the year 2008-2009 and were re-appointed for two years successively. The term was to expire on 31^st March 2011 after completion of three years.

The Audit Committee of SEBI had recommended that the firm be reappointed for a further period of two years (2011-12 and 2012-13).

The decision to extend the years is aimed at ensuring "independence and continuity" of the auditors, an official said.

The official said that the SEBI may henceforth follow a policy whereby internal auditors are appointed for a period of three years extendable for a further period of up to two years.

Chokshi & Chokshi provides professional expertise and integrated range of advisory, assurance, tax and international accounting services across the world. In India it operates through it offices at Mumbai and Pune.