Regulators across the world have always cautioned people against investing in any financial product until they have checked out its various features. Thereupon, most investors choose a financial product based on various metrics, such as risk appetite, credit worthiness, product ratings and returns on investment, etc. While the risks associated with equity investing is widely published in various forums, that for debt market products can be known from their ratings assigned by credit rating agencies. These help a customer to choose the right product as per their risk profile and enable informed investing.
While there exists a risk index or rating system for a suit of financial products, such a system is needed to rate financial advisers as well. That is because many investors interact with investment advisers, research analysts and mutual fund distributors for their investing needs. Time and again, we come across instances of intermediaries such as brokers, investment advisers, research analysts, fund houses, etc., or flouting all norms in pursuit of bigger commissions or even committing frauds, putting at risk the hard-earned money of investors. Though regulators take punitive measures against such intermediaries, many investors often get jittery when they hear of such incidents and take decisions that jeopardizes their investments or aggravates their losses.
To avert this, regulators and stock exchanges prescribe a code of conduct, release investor charters; issue do’s and don’ts for investors; and mandate reporting of various parameters which can help investors identify the right institution or intermediary. Though this is a commendable job, there is a need to realize that investors are not doing due diligence before associating with an intermediary and so regulatory steps in this direction need to be strengthened.
This issue could perhaps be dealt with by developing a rating system, credibility score or compliance dashboard for all intermediaries associated with the securities market. This score could be calculated on the basis of various parameters—number of investor grievances against an intermediary, type of complaint or grievance, time taken to resolve such a grievance, compliance lapses to various regulatory requirements, frequency of technical glitches, assets under management, monthly traded volume, etc.
This rating or credibility score for financial intermediaries becomes all the more contextual today to curb the role of finfluencers—many of whom have proclaimed themselves to be new age advisers without having the necessary competencies, requisite licenses and valid registrations. Further, what exacerbates the situation is the tie-up of these finfluencers with various financial intermediaries who mislead investors into signing up with their platforms or agree to their services in return for a fee or share of brokerage and other freebies.
Perhaps, existing credit rating agencies could take the lead in developing a score for intermediaries based on the approach followed by them for rating financial instruments. The score may be published on a monthly or quarterly basis in the public domain through the websites of Sebi, Amfi and other institutions. The regulator may also mandate the intermediaries to display this score on their websites.
Assessing a financial market intermediary on this score or rating would enable the investor to understand their credit worthiness and take an informed decision of associating with the right intermediary. Additionally, the regulator may also seek the opinion of various securities market intermediaries to draw a road map for developing this credibility scoring system.
Kuldeep Thareja, Mitu Bhardwaj & Rasmeet Kohli are working with the National Institute of Securities Markets.
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Updated: 24 Jul 2023, 10:30 PM IST