Lex Knowledge (January)

1st January 2020

SEBI imposes restrictions on Investment Advisors in providing advice on free trial basis and without risk profiling; also mandates advisory fees through banking channel only and display of complaints’ status on the website.

(a) Restriction on free trials:

Regulation 16 and 17 of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“IA Regulations”) mandates the investment advisors to carry out the risk profiling of the investors while giving investment advice. However, it has been observed by SEBI that investment advisors are providing advice on free trial basis without considering risk profile of the client.

In order to further strengthen the conduct of the investment advisors while providing investment advice and to safeguard the interest of investors, SEBI has imposed restriction on the investment advisors to provide free trial for any products/services to prospective clients. Further, SEBI has mandated the investment advisors to obtain consent of the client on completed risk profile either through registered email or physical document.

Seemingly to avoid any misuse and “tweaking” by charging a nominal fee in the form of “advance” to offer trials, and ensure the regulatory objectives are achieved, SEBI has also imposed restriction on the investment advisors
to accept part payments, where some part of the fee is paid in advance, for the services. SEBI has, however, not clarified if free trials can be offered after carrying out risk profiling and ascertaining suitability of the products.

(b) To receive fees through banking channel only:

It has also been observed by SEBI that investment advisers are receiving advisory fee in the form of cash deposit in their bank accounts or through payment gateways which does not provide proper audit trail of fees received from the clients.

In order to ensure transparency in dealing with the clients, investment advisors have been obligated to accept fees strictly by account payee crossed cheques / demand draft or by way of direct credit into their
bank account through NEFT/ RTGS/IMPS/UPI. SEBI has specifically banned the acceptance of cash deposits.

(c) Display of complaints status on website:

In order to bring more transparency and enable the investors to take informed decision regarding availing of advisory services, investment advisors are henceforth required to display the following information on the
homepage (without scrolling) of their website/mobile applications. The information should be displayed properly using font size of 12 or above and made available on monthly basis (within 7 days of end of the previous month).

Number of complaints
At the beginning of the month Received during the month Resolved during 

the month

Pending   at   the 

end of the month

Reasons for 

pendency

All the above measures came into force from 1st January, 2020.

Disclaimer – While we have taken reasonable care while preparing this newsletter, we accept no responsibility for any error that it may contain, or for any loss or damage, however caused, to any person that relies on it. Readers are specifically advised to seek professional advice before taking any action on the basis of this newsletter.

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