Tax Hotline March 21, 2011

Regulatory checks and balances for Indian Wealth Managers : A boon, a burden

When the news of the INR 400 Crore Citibank scam made headlines all over the Indian financial world, wherein funds of various high networth individuals were fraudulently siphoned by a relationship manager, it made the regulators sit up and take notice of the fact that the 1 trillion USD worth wealth management industry, with its enormous turnover and burgeoning and creative products, suffered severely from the lack of adequate checks and compliance requirements. It was then that the Securities and Exchange Board of India (SEBI) along with the Reserve Bank of India and the Government of India has decided to work upon and introduce new rules to regulate the wealth management industry in order to make it compliant and protect the interests of the investors.

The issues

As the markets get more and more sophisticated, wealth managers indulge in creation of various financial products which they constantly market to their clients through their respective relationship managers. These products, being hybrid, sophisticated and complex in nature, cut through banking, capital markets and insurance regulatory frameworks. Relying on the on-going financial relationship, credibility and track-record, private clients permit their relationship managers to make investments on their behalf into such products. In most cases, the relationship manager operate under a power of attorney from their clients.

Also, mostly the wealth management institution indemnifies itself by having the clients waive any recourse against it in case of loss on investment decisions made by their relationship managers. Thus, the risk and for the relationship managers investment decisions is passed on to the customer, who does not have any control or say over the decisions made.

SEBI also highlighted that the remuneration of such relationship manager was not linked to the profits made by the client but by the number of financial products successfully sold by it to its clients, thus resulting in dis-alignment of interests.

Furthermore, the very industry desirable 'light-touch and tissue-paper-thin' i.e. minimalistic nature of the regulations, made it difficult to determine the cost of compliance, which was also highlighted as one of the challenges faced by the regulators in this regard.

Steps taken

SEBI along with the Government of India formed the Financial Stability and Development Council which serves as an interface between all financial regulators and holds discussions on policy formulation for wealth/asset management companies. Apart from policy-making, SEBI also intends to resolve the inter-regulatory co-ordination by working along with the other regulators at implementing rules and procedures on operations and surveillance levels administered by a wealth manager while handling a client's funds. It will also determine the cost of non-compliance which will be required to be borne by such wealth management companies.

Furthermore, SEBI has already advised wealth management institutions to implement additional due diligence measures for institutional distribution and intends to put a common set of rules into place to be followed by all such institutions.

Alongside, SEBI will also come out with guidelines to allow foreign retail investors, who are now permitted to invest into mutual funds scheme into India as provided under the Indian Budget 2011-2012.

The results, as desired

It is intended that the proposed regulations will bring about more accountability and liability on the shoulders of the wealth managers, who in turn, will put into place stringent checks on handling and investing of clients' funds. It is hoped that this will render adequate protection of the client's interests.

There will also be compliance requirements that will be required to be fulfilled by each such wealth management institution. Failure to comply would result in cost/ penalty being incurred by such wealth manager, fiscal or otherwise and the regulators are counting on such measures to bring about compliance on the procedures and reporting by wealth managers.

With the foreign retails investors now being permitted to invest into mutual funds, SEBI believes that introduction of these regulations will help in the growth of wealth managers by enabling them to handle a wide array of clients and put them on par with international asset managers.


The introduction of regulations will create a level playing field thus putting domestic Indian wealth managers on par with international asset management companies whilst dealing with foreign clients. The compliance and reporting obligations on such managers will also create an environment of trust and comfort for investors, who (in most cases) entirely rely on the recommendation and judgment of such relationship managers for their investments.

Additional compliance checks, however, will require new systems and infrastructure to be put into place, which in turn, will increase the cost of operations for domestic wealth managers. As is a practice, the cost is often passed on to and ultimately borne by the ultimate client, thus reducing his gains considerably.

What will be interesting to see is whether the already over-demanding ultimate private client will be comfortable with bearing the additional burden on his invested capital or if the wealth management companies will consider reducing their share in the profit pie with the consolation that increased governance standards may put them in line with their international counterparts, thus making them more market-friendly and attractive.

Should you have any suggestions or comments on the regulations that should be enacted in this regard, please do drop in a line to us.

International Wealth and Succession Planning Team

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