Norms for investment advisors

The market regulator felt it necessary to resolve or atleast mitigate the conflicts especially in the case of financial products because of their two  peculiar characteristics. Firstly, the products are intangible and conceptually more difficult to understand.  Secondly, the pay‐offs are in a distant future and can be camouflaged by several factors external to the product.

The paper dwelt on major conflicts of interest in the financial product distribution space. Foremost is the dual role played by distributors as an agent of investors as well as of the manufacturers as they receive their payments from two sources -- commissions from the manufacturers and advisory fees or other charges received from the investors. This raise the question as to whose interests do they represent, the manufacturers' or the investors'?  It often results in a situation where the distributors are loyal to themselves.

The proposed regulatory framework intends to regulate the activity of providing investment advisory services in various forms by a wide range of entities including independent financial advisors, banks, distributors, fund managers etc.  The investment advice may be provided for investments in various financial products including but not limited to securities, insurance products, pension funds, etc.

While the activity of giving investment advice will be regulated under the proposed framework through an SRO, issues relating to financial products other than securities shall come under the jurisdiction of the respective sectoral regulators such as action for mis-selling, violation for code of conduct, conflict of interest etc.

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