FinTechRobo Advisors: Introducing the Era of Automated Investment Advice Part-II

INTRODUCTION

In the previous part, we discussed about the concept of Robo Advisors, why it was introduced, and how it will help transform the Investment Sector in India.

The increase in usage of smartphones, access to the internet and the ‘Digital India’ campaign have been influencing factors for the younger Indian demographic to pursue automated investment advisory for their investment advice in place of traditional advisors, which is resulting in the exponential growth of Robo Advisory Platform in India.

In case, a person is interested in offering Automated Investment Advice and becoming a “One Stop Solution” for Investment Advice, then the current regulatory scenario, the framework, and the challenges faced by the Robo Advisor Platform in India are key factors to be considered.

In this article, we attempt to discuss about the current regulatory infrastructure, the framework, the challenges, the pros and cons, and what is the future of the Robo Advisory Industry in India.

THE REGULATORY INFRASTRUCTURE

SEBI (Investment Advisors) Regulation, 2013

The Securities Exchange and Board of India (“SEBI”) is the regulatory authority, which governs the Investment Sector in India.

In 2016, SEBI released a consultation paper titled “Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013”, wherein for the first time SEBI discussed about the online investment advisory services and use of automated tools i.e., Robo Advisors to provide investment advice.

The consultation paper stated that since there is no express prohibition under SEBI (Investment Advisors) Regulation (“IA Regulation”) on the use of automated advice tools by registered investment advisors to provide Investment Advice. The Investment Advisors providing investment advice through Robo Advisors are required to comply with the existing IA Regulations.

Furthermore, since risk profiling of the investor is mandatory for the investment advisors before providing investment advice, the investment advisors using Robo Advisors are required to comply with the additional compliances stated below –

• • • Ensure that the automated tools used are fit for the purpose;

  • • Robust systems and controls to be in place to ensure that any advice made using the tool is in the best interest of the client and suitable for the clients;

  • • The records pertaining to risk profiling and risk assessment of the client and suitability assessment of the advice being provided shall have to be maintained by the investment adviser for a period of five years.

  • • There should be proper disclosure to the clients in relation to how the tool works and its limitations of the outputs it generates;

  • • There should be comprehensive audit system put in place;

  • • The Investment advisor using the tool shall be held responsible for the advice;

  • • The automated tools used by the advisers shall also be subject to audit and inspection

THE FRAMEWORK

1. Registration

In India, as per SEBI IA Regulations, neither a person nor a body corporate can provide investment advice without registration. Therefore, such investment Advisors are required to register such Platform with SEBI under Regulation 3 of the IA Regulation.

The SEBI vide circular dated 23.09.2020 has stated that an individual cannot provide, both, advisory and execution services at the same time. Therefore, in case of an individual intending to provide investment advice through Robo Advisor platform is required to set up a separate entity i.e., a Company or a Limited Liability Partnership (“LLP”).

However, in case of a body corporate wishes to provide both advisory and execution services at the same time, then such body corporate is required to provide advisory services through a separate identifiable department or division.

2. Networth

a. Company

The Networth of a company or an entity as per Regulation 8 of SEBI IA Regulation should be not less than Rs. 50,00,000/- Lakh (Rupees Fifty Lakh).

b. Individual

The Networth of individual investment advisor is net tangible assets of value not less than Rs. 5,00,000/- Lakh (Rupess Five Lakh).

3. Qualification Requirement

The individual investment advisor or a principal of a non-individual investment advisor intending to be registered as an investment advisor with SEBI is required to fulfil the minimum qualification criteria stated below –

a. professional qualification  or  post-graduate  degree  or  postgraduate  diploma (minimum two years in duration) in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, or actuarial science from a university or an institution recognized by the Central Government or any State Government  or  a recognized foreign  university  or  institution  or  association    or  a professional qualification by completing a Post Graduate Program in the Securities Market (Investment Advisory) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute;

b. An experience  of  at  least  five  years  in  activities  relating  to  advice  in  financial  products or securities or fund or asset or portfolio management;

However, the qualification requirement with respect to online investment advisor i.e., Robo Advisors is not clarified under the IA Regulations. Therefore, it is assumed that the aforementioned qualification criteria is required to be complied by the person managing the Robo Advisory Platform.

4. Certification Requirement

The individual investment advisor or a principal of a non-individual investment advisor i.e., Robo Advisor shall have at all times a certification on financial planning or fund or asset or portfolio management or investment advisory services –

a. From NISM; or

b. From any other organization or institution including Financial Planning Standards Board of India or any recognized stock exchange in India provided such certification is accredited by NISM.

THE CHALLENGES

1. Under the IA Regulations, since the qualification requirement with respect to the Robo Advisor Platform is not clarified. It is assumed that such requirements is applicable on the person managing the online advisor. However, this requirement seems to defeat the purpose of establishing cost-effective technology-based advisors, as onboarding professionals with the aforementioned qualifications will rise up the overall costs.

2. In December 2019, SEBI in order to strengthen the conduct of Investment Advisors introduced a circular, wherein the SEBI had asked investment advisors to give investment advice only after completing the risk profile of the client based on information provided by the client and obtaining prior consent of the client on completed risk profile either through registered email or physical document.

Interestingly, the SEBI vide circular dated 23.09.2020 had stated that electronic consent taken through a digital agreement and sharing the same on the client’s email cannot be considered as consent.

Therefore, electronic consent will not fulfil the requirement of mandatory agreement between the investment advisors and the client as required under Regulation 19(1)(d) of the IA Regulations and the Investment advisor is now mandatorily required to take consent through physical document.

These advisors mainly operate for the retail investment sector and clients who seek digitally viable and cost-effective investment advisory services. Therefore, imposing the mandatory requirement of physical agreement will render many businesses unfeasible and will act as a move to draw the industry backward.

3. The absence of specific regulations and guidelines for regulating Robo Advisors with respect to privacy, anti-money laundering, transparency, audits, and licensing. The Robo Advisory technology in India is still at a budding stage as the investors are always under conflict and chaos due to a lack of clarity of the regulation on the subject.

PROS AND CONS

THE FUTURE OF ROBO ADVISORY IN INDIA

The constant development in technology, increase in usage of smartphones, increase in access to the internet, the ‘Digital India’ campaign, profound customer demand, higher-tech awareness, growing investment platforms, favorable demographics, and enabling Government policies have resulted in the exponential growth of Robo Advisory Platform in India.

According to research by MEDICI, a fintech research firm, the number of Robo Advisors in the country rose from three in 2013 to 16 companies by the end of 2019. Further, the Assets under management (AUM) in the Indian Robo Advisory segment are expected to reach $53.9 Bn by 2025, with a 43.8% CAGR during 2020-2025.

The Robo Advisors Platform has gained huge traction over the last few years as a result of digitally viable and cost-effective investment advisory services. The Robo Advisory Platform in India is currently at the 3.0 phase and is expected to move towards phase 4.0.

Once the Robo Advisory Platform enters phase 4.0 the emergence of fully automated investment advice will result in a more cost-effective and rationalized fee structure environment for its users resulting in Higher financial inclusion and rapid development of the Investment sector in India.

AMLEGALS REMARKS

The Robo Advisory industry in India is in its developing stage and as discussed earlier is witnessing rapid growth, as a result of rising financial awareness, profound customer demand, higher-tech awareness, etc., the Robo Advisory Platform is expected to grow to the extent of $53.9 billion by the year 2025.

In India, currently, there is no specific regulation governing the Robo Advisory platforms in India and SEBI has just extended its oversight over Robo Advisor Platforms with respect to risk profiling, record-keeping, and compliances under the ambit of existing IA Regulations.

However, this is the era of digitization and rapid development bringing new legal complexities and these new legal complexities give rise to innovative regulatory requirements.

Therefore, as a result of new regulatory challenges introduced by the automated advisors, there is an inevitable need for introducing a robust regulatory infrastructure for regulating Robo Advisors in India to protect the interest of unsophisticated retail investors, as this industry holds a lot of potential, which can help transform the financial ecosystem of India.