RBI issued a Report on Household Finance Committee on August 24, 2017.
In the report the Committee has presented data on Indian household and their finances. The Committee has provided their recommendations on Mortgage and collateralised loans (including CERSAI), Pension and annuities, Insurance, Gold and improving household finance data.
What will be of interest to you is the recommendation of the Committee on financial services.
In this second issue of CS Edge, I will highlight the recommendations of the Committee for financial services.
#1 – Definitions
The Committee has proposed the definition of “Financial Advice” and “Financial Distributor” which is as follows:
Financial Advice is the action of providing personal recommendations to a customer, which can either be initiated by an act of the firm, or by way of a request from a customer. Any situation that involves any of the following set of actions constitutes advice:
- A personal recommendation, provided in exchange for a fee, is made to a customer to purchase or sell a particular financial product or a set of financial products.
- A firm or individual consulted by a customer has deemed a product or a suite of products to be suitable to a customer, in exchange for a fee.
- A customer initiates an action that is in line with the personal recommendation specifically sought from a firm or individual, in exchange for a fee.
A Financial Advisor is a firm or individual who performs the actions above.
A Financial distributor is a firm or individual who engages in a financial transaction with a consumer, which is remunerated or compensated by the producer of the financial product by way of a commission, service fee, or any other form of non-monetary remuneration.
#2 – An SRO-driven regulatory system for financial advisors
The Committee has proposed an SRO (Self Regulatory Organisation) driven regulatory system for financial advisors across all products which will use this unified identification number. The Committee has proposed creation of a unique “license number” for financial advisors to replace the current registrations such as the ARN (for mutual fund distributors), RIA (For SEBI registered Investment Adviser), RA (for SEBI registered Research Analyst), and EUIN (for employees of a Mutual Fund Distributor).
#3 – Uniform Advisory Regulations
The Committee proposes a uniform structure under which all investment advice is brought, regardless of the specific product or function to which this advice pertains. This will be applicable to insurance advisory and mutual funds advisory too.
#4 – Segregation of advisory and distribution functions
As you must be aware that SEBI has already proposed segregation of advisory and distribution activities through its consultation paper on an amendments to Investment Advisers Regulations.
The Committee has proposed segregation of advisory and distribution activities of all financial products including insurance and mutual funds. This will be applicable to banks too.
The proposal of the Committee is that every investment should have two tags – that of a distributor code and an advisor code, with uniform nomenclature which is self-explanatory across all financial products.
Click here to view the RBI Committees’ report.
CS Edge is a weekly newsletter. It is my effort to bring in news from the various regulators including Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI).