A growing number of India’s leading wealth management practitioners are increasingly receptive to the idea of segregating wealthier clients as professional or accredited investors. However, there are concerns and mixed views about relaxing the rules for this segment.
In a survey of more than 125 leading professionals in Indian wealth management, around 75% of respondents believe that the segregation of investors into retail and HNI (professional or accredited investors) will be a good thing to take the Indian wealth management market to the next level.
However, the views were split when considering whether to follow examples in more developed wealth hubs like Singapore and Hong Kong – in terms of offering a relatively more ‘relaxed’ rules framework for HNI clients, or professional investors.
In fact, there was a greater tilt towards the “no” camp in terms of such a reform.
Most of the respondents emphasised that they believe rules should be the same for all clients and should not be dependent on wealth levels.
Reflecting client needs and sophistication
Some of the respondents were also of the view that instead of segregating on the basis of ticket size, it would be better to segregate on the basis of financial literacy.
Even with a high level of investable assets, investors could show low financial investment awareness or knowledge, believe many industry players.
Further, each client has a different understanding of markets and products, so the classification of investors could be based on different levels of product and investment knowledge.
There was broad acknowledgement that wealthier Indian clients do have more diverse needs, which current Indian laws are not equipped to understand.
Flexibility where it suits
Among those practitioners who believe that wealthier clients in India could have more relaxed rules, the argument was that they had created wealth via risk taking and making hard decisions even in the face of uncertainty. As a result, they don’t need to be bound by highly restrictive regulations.
The UHNI segment, meanwhile, is also seen as far more developed. There is greater knowledge within these individuals on the various aspects of investing, given their broader access to the right information and resources.
For example, many of them have up formal family offices to cater to their specific investment needs and have a team of experts to evaluate products and ideas.
Given their quasi-institutional nature and equivalent knowledge levels, the rules should definitely be more relaxed for these clients and should be segregated from HNIs, believe practitioners – and these clients should be separated from retail investors, according to some of the views.
Mis-selling matters most
For those in the “no” camp when it comes to segregating how clients get treated, given that there continue to be instances of mis-selling and misrepresentation in the industry, relaxing current regulations did not seem feasible.
As one participant noted, being wealthy does not in any way mean these clients should be willing to take on higher losses.
Instead of easier regulations, some participants say they favour rules that offer more flexibility for sophisticated investors with knowledge of complex products and a willingness to take higher risks.
Self-regulating
One of the solutions suggested by several participants in the survey was the establishment of a self-regulatory organization – which would clearly lays down the practices rules and penalties.
Notably, this has also been suggested by markets regulator SEBI.
Learning from others
In general India’s wealth management sector would clearly benefit from an approach to segmenting clients in the form of ‘accredited’ or ‘professional’ investors.
This is already a known and accepted concept in markets such as the US. It has also been used successfully in Asia, especially in Singapore and Hong Kong.
Further, it is an ongoing process which need to be reviewed. For example, Hong Kong’s securities regulator is consulting the local market (until early April 2017) on proposed amendments to its rules on professional investors (PIs).
Under the proposals, the watchdog envisages that more persons will qualify as PIs. Nevertheless, intermediaries remain subject to the suitability requirement and other fundamental requirements when serving them.
Essentially, the proposed amendments are intended to enhance market transparency and promote consistency in the application of the PI rules. And the key consideration is that the proposals should cater for the business needs of intermediaries and their clients without compromising investor protection.
Applies in India, such segmentation of customers rules would also allow more targeted marketing for product producers as well, believe some practitioners.
Interestingly, one of the survey respondents proposed similar rules for advisers. Accredited advisers, goes the suggestion, should be allowed to sell complex products and only to accredited investors.
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