Rbi Guidelines on Wealth Management,Marketing,Distribution by Banks

 

GUIDELINES GUIDEL INES ON W EALTH MANAGEMENT/MARKE MANAGEMENT/MARKETING/DISTRIBUTION TING/DISTRIBUTION SERVICES OFFERED BY BANKS- DRAFT

Introduction 1.1 The term Wealth Management comprises a number of aggregated financial services. The following categori categories es of servic services es o offered ffered by banks in India to ttheir heir customers are generally included in the term ‘Wealth Management Services’ Services ’  (WMS): i)

Referral Services

ii)

Investm Investment ent Advis Advisory ory Services (IAS); and

iii) Portf Portfolio olio Management Services (PMS). In addition to the above services, banks also market and distribute third party financial products, which, though not part of W MS, is an al allied lied activity. The particular business model adopted by individual banks may differ in terms of products and services offered, corporate structure, clients targeted and revenue generated, 1.2 Though these services are offered by banks, Investment Advisory as well as Portfolio Management Services are regulated by SEBI. Similarly, in offering referral services for insurance, banks are required to comply with relevant IRDA regulations. While marketing and distributing third party financial products, banks are acting as agents for entities regulated by other regulators. Reserve Bank has also issued guidelines for banks on these matters from time to time from the perspective of permitting entities regulated by RBI to undertake these activities. 1.3

Over time, there ha has s bee been n an expansion o off tthe he roles and responsibilities of

banks as providers of these services. Concerns arising out of mis-selling, conflict of interest, requirement of grievance redressal, etc, have arisen and after debate in inter-regulatory forums it was decided to issue guidelines addressing the same. Further, in the recent investigations undertaken by RBI in the light of reported allegations that certain banks were involved in structuring transactions to aid tax evasion and fraudulent transfer of funds, it was observed that many of these transactions centered around the W MS provided by banks as well a as s marketing of third party products. The main regulatory concerns have arisen regarding violation of KYC/AML guidelines, mis-selling of products or selling of products that are

 

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unsuitable for the client, conflict of interest between the marketing and advisory/ financial management function, and lack of robust risk management systems and procedures proced ures leading tto o frauds. 1.4 Mis-selling raises serious consumer protection issues. Further, as observed from the recent allegations, WMS activities as well as marketing third party products can expose banks to serious reputational risks. These Guidelines define the scope of these servi s ervices. ces.

2. Current Regulatory Prescript Prescriptions ions 2.1 Marketing and Di Distributio stribution n of third p party arty p products roducts 2.1.1 Marketing and distribution of fina financial ncial products a are re undertaken by banks by acting as agents of the third party financial services provider. Initially, banks were permitted to undertake retailing of government securities, subject to certain conditions, since it was felt that with the large network of branches, banks would be in a position to enlarge the market for Government securities which would, in turn, help in activating the secondary market for Government securities and making the market for such securities deep and broad-based. 2.1.2

Later, banks were permitted to market mutual funds, subject to the following

conditions: (i)

Banks should only act a as sa an n agent o off the customers, forwarding the investor's

applications for purchase/sale of MF units to the Mutual Fund/the Registrars/the transfer agents. The purchase of units should be at the customers' risk and without the bank guaranteeing any assured return. (ii)

Banks should not acquire units o off Mutual Funds from the second secondary ary market.

(iii)

Banks sh should ould not buy back units of mutual funds from their customers.

(iv)

If banks propos propose e to extend any credit facility to individuals again against st the

security of shares or units of Mutual Funds, sanction of such facility should be in accordance with the extant instructions on advances against shares, debentures and units of mutual funds.

 

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(v)

Banks holding custody o off MF units on behalf o off ttheir heir custo customers mers should

ensure that their own investments and investments belonging to their customers are kept distinct from each other. (vi)

Banks should put iin n place adequate a and nd effective control mechanisms mech anisms as

detailed in our circular   DBOD.No. DBOD.No.FSC FSC BC.143A/24.4 BC.143A/24.48.001/91-92 8.001/91-92 dated June 20, 1992. Besides, with a view to ensuring better control, retailing of units of mutual funds may be confined to certain selected branches of a bank. 2.1.3 Subsequ Subsequently, ently, it wa was s de decided cided to grant banks general permissi permission on for engaging in insurance agency business, subject subject tto o the ffollow ollowing ing conditions: (i)

The ban bank k should comply with the IRDA regulations for acting as ‘composite

corporate agent’ with insurance companies. (ii)

The bank should not adopt a any ny restrictive practice of forcing it its s customers to

go in only for a particular insurance company in respect of assets financed by the bank. The customers should be allowed to exercise their own choice. (iii)  As the th e participation by a bank’s cust customer omer in iinsurance nsurance pr products oducts is purely on a voluntary basis, it should be stated in all publicity material distributed by the bank in a prominent way. There should be no ’linkage’ either direct or indirect between the provision of banking services offered by the bank to its customers and use of the insurance products.

(iv) The risks, if any, involved in insurance a agency gency sh should ould no nott get transf transferred erred to the business of the bank. 2.1.4

Banks may be marketing / referring several competing products of of v various arious

mutual fund / insurance / financial companies to their customers. Keeping in view the need for transparency in the interest of the customers to whom the products are being marketed / referred, banks we were re advised to disclose to the cus customers, tomers, details of all the commissions / other fees (in any form) received, if any, from the various mutual fund / insurance / other financial companies for marketing / referring their products. This would be required even if the bank is marketing the products of only one mutual fund/company.

 

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2.2 2.2.1

Referral Services It wa was s e envisaged nvisaged that under the referral arran arrangement, gement, banks wo would uld provide

physical infrastructure within their select branch premises to insurance companies for selling their insurance products to the banks’ customers with adequate disclosure and transparency, and in turn earn referral fees on the basis of premia collected. Initially, banks were permitted to undertake insurance referral business after obtaining obtain ing specific per permission mission from RBI and IRDA. It was later de decided cided that banks need not obtain prior approval of RBI for engaging in insurance referral business without any risk participation. Banks were advised advised to e enter nter into Agreements with tthe he insurance company for allowing use of premises and making use of the existing infrastructure of the bank.

They were also advised to comply with the IRDA

regulations for referral arrangement with insurance companies, in addition to the stipulations mentioned at para 2.1.3 a above, bove, viz, they should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. The customers should be allowed to exercise their own own choice. As the participat participation ion by a bank's customer in insurance products is purely on a voluntary basis, it should be stated in all publicity material distributed by the bank in a prominent way. There should be no 'linkage' either direct or indirect between the provision of banking services offered by the bank to its customers and use of the insurance products. 2.2.2

This pe permission rmission was later e expanded xpanded to permit banks to offer referral services

to their customers for financial products subject to the following conditions: i)

The bank/third party issuers o off the financial p products roducts should strictly adhere to

the Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002 guidelines in respect of the customers who are being referred to the third party issuers of the products. In this context, KYC/AML Guidelines provided inter alia, that since information provided by the customer for KYC compliance while opening an account is confidential and divulging any details thereof for cross selling or any other purpose would be in breach of customer confidentiality obligations, banks were, advised to collect any information about the customer for a purpose other than KYC requirements, separately, purely on a voluntary basis,

 

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after explaining the objectives to the customer and taking express approval for the specific uses to which such information could be put. ii)

The bank sh should ould ensure that the selection of third party issuers of the

financial products is done in such a manner so as as to take car care e of the reputational risks to which the bank may be exposed in dealing with the third party issuers of the products. iii)

The bank should make it explicitly clear upfront to the customer that it is

purely a referral service and strictly on a non-risk participation basis. iv)

The third party issuers should adhere to the relevant regulator regulatory y guidelines

applicable to them. v)

W hile offering referral services, the bank should strictly adhere to the

relevant RBI guidelines 2.2.3

The instructions at para 2.1.4 regarding transparenc transparency y and disclosure would

also apply to banks o offering ffering referral services, viz, they were advised to disclose to the customers, details of all the commissions / other fees (in any form) received, if any, from the various mutual fund / insurance / other financial companies for referring their products. This would be required even if the bank is referring the products of only one mutual fund/company. 2.3

Investment Advisory Services (IAS)

Prior to the issue of SEBI (Investment Advisers) Regulations 2013, the activity of investment advisory services was regulated as per SEBI (Portfolio Managers) Rules and Regulations, 1993. Banks, carrying out investment advisory ser services, vices, require prior approval of RBI, which is issued on a case -to-case basis, subject to certain conditions.

2.4

Portfolio Management Services (PMS)

2.4.1 The activity o off PMS is regulated by SEBI a as s per SEBI (Portfolio Managers) Rules and Regulations, 1993. Consequent to certain irregularities observed in the

 

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securities transactions of banks, general powers given to banks to operate Portfolio Management Schemes (PMS) and similar schemes were withdrawn and banks were advised not to restart or introduce any new PMS or similar schemes in future without obtaining prior approval of RBI, vide circular No. DBOD.BC.73/27.07.001/94-95 dated June 7, 1994. These instructions were also made applicable to subsidiaries of banks, including bank-spons bank-sponsored ored NBFCs NBFCs.. 2.4.2 i)

The conditions under which banks c ould offer PMS are are a as s under: Only those banks which can provide such services on their own should

undertake the a activity. ctivity.

Funds a accepted ccepted for portfolio management from their

clients, should not be entrusted to another bank for management. ii)

PMS should be in the nature of investm investment ent consultanc consultancy/management, y/management, for

a fee, entirely at the customer’s risk without guaranteeing, either directly or indirectly, a pre-determined return. The bank should not indemnify the client directly or indirectly in any manner in the event of the bank not being able to achieve the minimum stipulated rate of return specified, if any, in the agreement. The bank should charge definite fee for the services rendered independent of the return to the client (i.e. benefit earned or losses incurred by the client on account of acting on the advice of the bank). iii)

PMS should be provided to the clients in respect of the latter’s long term

investable funds. Funds should not be accepted for portfolio management for a period less than one year. In case of placement of funds for portfolio management by the same client on more than one occasion on a continuous basis, each such placement should be treated as a separate account and each such placement should be for a minimum period of one year. iv)

Portfolio funds should not be deployed for lending in call/notice call/notic e money;

interbank term deposits and bills rediscounting markets and lending to/placement with corporate bodies. v)

Banks should maintain client wise account/rec account/record ord of funds accepted for

management and investments made thereagainst and all credits (including realized interest, dividend etc) and debits relating to the portfolio account should be put through such account. The tax deducted at source in respect of interest/dividend on securities held in the portfolio account should be reflected in

 

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the portfolio account. The account holder should be entitled to get a statement of the portfolio account. vi)

Bank's own inve investments stments and inve investments stments belonging to PMS clients should

be kept distinct from each other, and any transactions between the bank's investment account and client's portfolio account should be strictly at market rates. vii)

In case of transactions relating to PMS clients’ account, although the bank

could hold the securities belonging to the portfolio account in its own name on behalf of its PMS clients, all the relative records should give a clear indication that the transaction belongs to PMS clients and does not belong to banks’ own Investment Account. viii)

In the bank’s general ledger, a ‘Clients Portfolio Account’ should be

maintained and all the funds received by it for portfolio management should be reflected in it on a day-t day-to-day o-day ba basis. sis. The balance lying iin n this acc account ount (i.e the funds undeployed, if any, from this account) should be treated as outside borrowings of the bank and it should maintain Cash Reserve Ratio/Statutory Liquidity Ratio on such funds. ix)

The bank’s liability to its clients in respect of funds accepted by it for

portfolio management should be properly reflected in the published books of accounts of the bank/subsidiary. x)

Ther There e sh should ould be a clear functional separation of trading and back office

functions relating to banks’ own investment accounts and PMS client s' accounts. PMS clients' accounts should be subjected by banks to a separate audit by external auditors. xi)

Violati Violation on of these instructions would be viewed seriously and invite deterrent

action against the banks, which would include raising of reserve requirements, withdrawal of facility of refinance from the RBI and denial of access to money markets, apart from prohibition from undertaking PMS activity. xii)

These instructi instructions ons apply,

mutatis mutandis ,

to the subsidiaries of banks

except where they are contrar contrary y to sp specific ecific regulations of RBI or SEBI governing their operations.

 

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xiii)

Banks / subsidi subsidiaries aries of banks operating PMS or similar schemes with the

specific prior approval of the RBI are also required to comply with the guidelines contained in the SEBI (Portfolio Managers) Rules and Regulations, 1993 and those issued from time to time. xiv)

Apart from the conditions stipulated above above,, in the case of bank subsidi subsidiaries aries

offering discretionary PMS, banks were advised to ensure that the Board of the bank lays down appropriate risk management policy for the subsidiary which is effectively implemented by the subsidiary.  A list of circulars on the subjects referred to in the above p paragraphs aragraphs is encl enclosed osed as  Appendix.

3. Proposed Guidelines on Wealth Management Services a as s well as the Marketing/Distribution services offered by Banks

 A comprehensiv comprehensive e review of the existing Guidelin Guidelines es has been undertaken in view of the concerns stated in para 1.3 and 1.4 above. As stated therein, the major concerns arise from consumer protection issues involving conflict of interest, mis-selling and lack of adequate grievance resolution mechanism, and exposure to operational risk arising from weak internal control mechanisms.

3.1 3.1.1

Marketing/Distri Marketing/Distribution bution of financial products and services Although traditionally, the agency model for ma marketing rketing and distributing third

party products is without risk participation since the sales are on behalf of the issuer of the third party financial products, in case of a bank acting as distributor, the customer’s expectation from a bank  bank   in terms of the bank’s credibility  credibility   is significantly different than that of of any other agent o off the product issuer. Thus banks are expe expect cted ed to take greater care while undertaking such services, including avoiding mis-selling. 3.1.2 Mis-s Mis-selling elling of products and servic services es occurs when products that are unsuitable to the client profile are sold to him, particularly through misrepresentation or by linking it with banks’ banks ’  own products e.g., making purchase of insurance compulsory along with a car loan. Mis-selling can arise either from lack of knowledge of the product being sold, and occurs when untrained staff sell products. It may also arise

 

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from the provisions regarding payment of commissions and incentives which distort the selling structure. In the recent investigations undertaken by RBI referred to above, it wa was s observed that in some cases, banks did no nott have clear segregation o off duties of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products. 3.1.3

Section 10(1)(b)(ii) of the BR Act, 1 1949 949 prohibits a bank from employing o orr

continuing the employment of any person whose remuneration or part of the remuneration takes the form of commission or of a share in the profits of the bank, save as exempted in the Provis Proviso o thereto thereto.. Accordingly, payment of a portion of the commission earned on marketing and distribution of third party products by the bank to the staff would fall under the said prohibition. 3.1.4

W hile banks may act as agents of third-part third-party y issuers of financial products

and services on fee basis, without any risk participation, additional safeguards are necessary. Accordingly, the following conditions are prescribed in addition to the extant instructions: i)

As mis-selling is a serious issue in terms of consumer protection, the bank

should put in place a policy approved by its Board regarding marketing and distribution of third party financial products which should, inter alia specifically consider the issue of addressing mis-selling. ii)

Banks may only undertake marketing and distribution of financi financial al products

and services. The third party product issuer should be a regulated ffinancial inancial entity in India. iii) iii)

The bank should adhe adhere re to the guideli guidelines nes la laid id down by the sector speci specific fic

regulator for its agency business. iv)

Persons undertaking marketing/distr marketing/distribution ibution services of third party financia financiall

products should have suitable professional qualification for carrying out the role. There should be a system of continuous development & training (internal as also external) of such persons so that they may understand the complexity of the product.

 

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v) The sales process should be transp transparent arent with full disclosure a as s to the details of the product. The selling should be need based and mapped to the customer profile. vi)

Products should be marketed only in branches branches having specified specifi ed trained

personnel for the purpose. vii)

The persons undertaking such marketing/distribu marketing/distributions tions services, should not

be entrusted with any other approval/transactional process at bank branches. There should be a clear segregation of functions between marketing and operational staff. viii) Ther There e should be a Code of Conduct for the sales personnel who should sh ould adhere adhe re to tthe he same. ix)

The fact that the bank is acting only as an agent should be clearl clearly y brought

to the notice of the customer. x)

The bank should set up robust internal grievanc grievance e redressal machinery for

resolving issues related to mis-selling, agency services, service defaults etc. xi)

It may be en ensured sured that there iis s no violation o off Section 1 10(1) 0(1) (ii) of the BR Act

1949 in payment of commissions/incentives as well as of Guidelines issued by the regulator of the third party issuer. No incentive (cash or non-cash) linked directly or indirectly to the income received from marketing and distribution function should be paid to the staff engaged in marketing/distri marketing/distribution bution services of third third party produ products. cts. The staff o off the bank is also no nott permitted to receive any incentive (cash or non-cash) directly from the third party issuer. Banks must ensure that there is no violation of the above in the incentive structure to staff. xii)

The bank should adhere strictly to all KYC/AML Guidelines as issu ed from

time to time on the matter. xiii)

Transactions above Rs 50000 for these products should only be accepted

through debit to customers account with the bank and not in cash/cheque of other banks. There should be no evasion of these regulations by accepting several amounts for lower values from the same client to avoid the stated threshold. xiv) Banks should disclose to the customers, details o off all the commissions/other fees (in any form) received, if any, from the various mutual fund/insurance/other

 

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financial companies for marketing their products. This disclosure would be required even in cases where the bank is marketing products of only one mutual fund/ insurance company etc. xv)

Banks should disclose in the ‘Notes to Accounts’ to thei theirr Balance Sheet,

the details of fees/remuneration received in respect of the marketing and distribution function undertaken by them.

3.2 Segregation of WMS a activities ctivities of the b bank ank by setting up of a Se Seperately perately Identifiable Department or Division(SIDD)

3.2.1

Conflict

of

interest

arises

mainly

from

the

juxtaposition

of

the

marketing/distribution function and the advisory or funds management function. To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory/fund management as well as marketing, it is proposed to segregate the two functions. 3.2.2

According Accordingly, ly, banks may conduct all W MS activities, i.e., referral, IAS and

PMS either from a separate subsidiary or through a Separately Identifiable Department or Division (SIDD) set up for the purpose. Banks would require prior approval of RBI before undertaking WMS services whether through a subsidiary or a SIDD and would have to comply with the following requirements in both cases. The specific prescriptions in this regard are as under: i)

Such subsidi subsidiary/SIDD ary/SIDD would require to be registered with SEBI and compl comply y

with SEBI Guidelines regarding provision of these services, including code of conduct if any prescribed. ii)

There should be a strictly defined and clear demarcati demarcation on between the other

departments of the bank and the SIDD. It should be ensured that there is no intermingling of the distribution and advisory role in case a bank is undertaking both the activities. iii)

There should be an arm’s length relationship between the bank and the

subsidiary if WMS is being undertaken through the subsidiary.

 

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iv)

Persons manning the SIDD/s SIDD/subsidiary ubsidiary

qualification

for

carrying

out

the

role

should have suitabl suitable e prof professional essional of

Investment

Advisor

/Financial

 Advisor/Portfolio Manager. There should b be e a system of continuous development & training (internal as also external) of such persons. v)

W hile

the

sp specific ecific

a activity ctivity

o off

financial

advisory

services/portfolio

management will be regulated by SEBI, the Reserve Bank would continue to supervise the bank for all its activities including those undertaken through the SIDD. vi)

The bank/subsidiar bank/subsidiary y should set up robust internal grievance redressal

machinery for resolving issues related to services offered. vii)

The bank/subsidi bank/subsidiary ary should formulate a board approved customer

compensation policy in case of complaints related to services offered. viii)

Banks/subsi Banks/subsidiaries diaries should disclose to the cust customers, omers, details of all th the e

commissions/other fees (in any form) received, if any, from the various mutual fund/insurance/other financial companies for marketing their products. This disclosure would be required even in cases where the bank is marketing products of only one mutual fund/ insurance company etc. ix)

The instructions/ guidelines on KYC/AML/ CFT a applic pplicable able to banks, issued

by RBI from time to time, may be adhered to, in respect of customers to whom the services of referr referral/IAS/PMS al/IAS/PMS are being provided. x)

Banks may, through the SIDD/s SIDD/subsidiary, ubsidiary, provide ser services vices only in respect

of fin financial ancial services and products o off ffered ered by regulated financial services entites. xi)

Violation o off the instructions regarding undertaking o off referral/IAS/PMS referral/IAS/PM S

business by banks/subsidiaries will be viewed seriously and may invite deterrent action against the banks, which could include raising of reserve requirements, withdrawal of facility of refinance from the RBI and denial of access to money markets, apart from prohibition from undertaking referral/IAS/PMS activity.

3.3

Grievance Redressal Mechanism

Irrespective of the nature of the service offered, i.e., sale of third party products, advisory, referral or fund management, or the form in which it is provided, whether

 

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departmentally or through subsidiary or through SIDD, the bank must put in place a robust customer grievance redressal mechanism which should form part of the Board approved policy.

3.4

Operational Risk

Similarly, banks should put in place sound internal control mechanisms and a system of checks to address risk management.

4.

Specific Guideline Guidelines s pertaining to Wealth Manage Management ment Services

 Apart from the above, guidelines on the sp specific ecific W ealth Management Servic Services es offered by banks are enhanced and detailed as under:

4.1

Referral Services

4.1.1 Referr Referral al activities are those where the bank refers its custom customers ers to third party issuers of the financial products and services including those offered by bank’ subsidiaries/entities who are part of the same group. Under the referral arrangement, banks may also have a specific agreement with the third party issuer for sharing of customer information apart from providing physical infrastructure within select branch premises for selling their products and, in turn, earn referral fees. 4.1.2

In the

Report of the Committee on Bancassur Bancassurance, ance, 2011,

IRDA had

observed that there were several irregularities in the referral arrangements entered into by insurance companies with banks due to obliteration of the difference between corporate

agency

and

referral

business

and

regulatory

arbitrage

enabling

circumvention of the cap on commissi commissions ons and training requirements. In some cases, the referral banks were actually soliciting the customers for sale of insurance through untrained staff. As stated in the Report, this had prompted IRDA to permit only those banks which are not eligible to undertake corporate agency business to register as referral companies’ in terms of the IRDA (Sharing of database for distribution of insurance products) Regulations, 2010.

 

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4.1.3

As the differenc differences es between servic services es provided under re referral ferral model and those

provided under agency model have blurred in many cases, banks are perceived to be operating as agencies while in reality they may be providing only referral services. There are also instances where customer information has been shared with thirdparty issuers without obtaining an explicit consent or where the customer was not provided with the option of refusing to give consent for sharing personal information. Such practices practices have serious conse consequences quences leadi leading ng to reputation risk to the banks. It is therefore therefore proposed that banks shall not be pe permitted rmitted to enter into specific referral agreements with third party issuers of products and services. 4.1.4

However, if a customer requests a bank regarding obtention of financial

products/services, there will not be any objection to banks referring them to providers of such services.

4.2 4.2.1

Investment Advisory Services (IAS) The SEBI(Investm SEBI(Investment ent Advis Advisors) ors) Regulations 2013, defines an “investment

adviser” as any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called. Further investment advice is defined as advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financi financial al planning. All investment advi advisors sors will be requir required ed to obtain a certific certificate ate of registr registration ation from SEBI under these Regulations. Accordingly all banks and bank sponsored subsidiaries offering Investment Advisory Services will require to be registered with SEBI and comply with the provisions of the SEBI Investment Advisors Regulations.

4.2.2

Banks may offer Investm Investment ent Advis Advisory ory Services (IAS), a after fter o obtaining btaining specific

prior approval of RBI (DBOD), subject to the following conditions:

 

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i)

Banks may offer Investm Investment ent Advisory Services (IAS) only through a

Separately Identifiable Department or Division (SIDD) which will conform to the prescriptions stated at para 3.2.2 above. ii)

The bank offering IAS (through the SIDD) should be regist registered ered under the

SEBI (Investment Advisers) Regulations 2013 and shall adhere to all SEBI prescribed regulations including the code of conduct formulated thereunder. iii)

The ser services vices offered should be purely advisory in nature. The bank should

not, under any circumstance, accept funds from the clients for management. iv)

The bank should no nott indemnif indemnify, y, di directly rectly or indirectl indirectly, y, for any losses iincurred ncurred

by the client as a result of acting on the advice of the bank. The agreement entered into with the client should provide a clause to this effect. v)

The bank should charge a definite fee for the services rendered iindependent ndependent

of any benefit or losses incurred by the client on account of acting on the advice of the bank. The bank should issue a suitable disclaimer in this regard.

4.2.3 Investment Advisory Services (IAS) by bank sponsored subsidiaries 4.2.3.1

Bank-sp Bank-sponsored onsored subsidiaries offering/desir offering/desirous ous of offering IAS, may follow

the following guidelines: i)

The sponsor-bank should obtain spe specific cific prior approval o off DBOD be before fore

offering Investment Advisory Services through an existing subsidiary or for setting up a subsidiary for this purpose. This would also be applicable to a foreign bank, having presence in India as a branch and desirous of offering IAS through its subsidiary. (Setting up of any subsidiary will, as hitherto, be subject to the extant guidelines on para-banking activities of banks). ii)

The subsidi subsidiary ary offering IAS sh should ould be regist registered ered under the SEBI (Investment

 Advisers) Regulations 2013 and shall adhere to all SEBI presc prescribed ribed regulations including the code of conduct formulated thereunder. iii)

The subsidiary iis s permitted to offer IAS to their customers only only on products

or services which a bank can offer.

 

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iv)

The instructions/ guidelines on KYC/AML/ CFT, issued by the regulator of

the subsidiary, as amended from time to time, may be adhered to, in respect of customers to whom the service of IAS is being provided.

4.3

Por Portfolio tfolio Management Services (PMS)

4.3.1

The a acti ctivity vity of PMS iis s regulat regulated ed by SEBI a as s per SEBI (Portfolio Managers)

Rules and Regulations, 1993 wherein a portfolio manager is defined as any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. As stated above, banks may undertake PMS only through a Separately Identifiable Department or Division (SIDD) or a subsidiary. PMS can be either discretionary or non-discretionary in nature. 4.3.2

PMS-Non-Discretionary

4.3.2.1

The non-discr non-discretionary etionary portfolio manager manages the funds in accordance accordanc e

with the directions of the client. Thus under Non-Discretionary PMS, the portfolio manager will provide advisory services enabling the client to take decisions with regards to the portfolio. The choice as well as the timings of the investment decisions rest solely with the investor. However the execution of the trade is done by the portfolio manager. Since in non-discretionary PMS, the portfolio manager manages client portfolio/funds in accordance with the specific directions of the client, the PMS Manager cannot act independently. 4.3.2..2

Banks may offer non-discretionary non-discretionary   portfolio management services, after

obtaining obtain ing specific prior approval of RBI (DBOD), su subje bject ct to t o the ffollow ollowing ing conditions: i)

All banks offering Portf Portfolio olio Management Services (PMS) w will ill be registered with

SEBI and regulated as per SEBI (Portfolio Managers) Rules and Regulations, 1993 and shall adhere to all SEBI prescribed regulations including the code of conduct formulated thereunder. ii)

Banks may undertake PMS only through a Separat Separately ely Identifiable Departm Department ent

or Division (SIDD) and will comply with all prescriptions regarding the SIDD as stated in para 3.1 above.

 

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iii)

Only those banks which can provide such services on their own should

undertake the activity. Funds a accept ccepted ed for portfolio management from their clients should not be entrusted to another bank for management. iv)

PMS should be in the nature of investm investment ent consult consultancy ancy / managem management, ent, for a

fee, entirely at the customer’s risk without guaranteeing, either directly or indirectly, a pre-determined return. The bank should not indemnify the client directly or indirectly in any manner in the event of the bank not being able to achieve the minimum stipulated rate of return specified, if any, in the agreement. The bank should charge definite fee for the services rendered independent of the return to the client (i.e. benefit earned or losses incurred by the client on account of acting on the advice of the bank). vii)

PMS should be provided to the clients in respect of the latter’s long term

investable funds. Funds should not be accepted for portfolio management for a period less than one year. In case of placement of funds for portfolio management by the same client on more than one occasion on a continuous basis, each such placement should be treated as a separate account and each such placement should be for a minimum period of one year. There will, however, be no objection to shuffling of relative investments during this period. viii)

Portfolio funds should not be deployed for lending in call/notice call/notic e money; inter inter--

bank term deposits and bills rediscounting markets and lending to/placement with corporate bodies. ix)

Banks should maintain client wise account/rec account/record ord of funds accepted for

management and investments made there against and all credits (including realized interest, dividend etc) and debits relating to the portfolio account should be put through such account. The tax deducted at source in respect of interest/dividend on securities held in the portfolio account should be reflected in the portfolio account. The account holder should be entitled to get a statement of the portfolio account. x)

Bank’s own investments and investments belonging to PMS clients should be Bank’

kept distinct from each other, and any transactions between the bank’ bank ’s investment account and client’ client’s portfolio account should be strictly at market rates. xi)

In case of transactions relating to PMS clients’ Account, although the bank

could hold the securities belonging to the portfolio account in its own name on behalf

 

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of its PMS clients, all the relative records should give a clear indication that the transaction belongs to PMS clients and does not belong to banks’ own Investment  Account. xii)

In the bank’s general ledger, a ‘Clients  ‘Clients  Portfolio Account’ should be maintained

and all the funds received by it for portfolio management should be reflected in it on a day-to-day basis. The balance lying in this account (i.e the funds unun-deployed, deployed, if any, from this account) should be treated as ‘outside borrowings’ of the bank and should be reckoned for calculation of Cash Reserve Ration/Statutory Liquidity Ratio. xiii)

The bank’s liability to its clients in respect of funds accepted by it for portfolio

management should be properly reflected in the published books of accounts of the bank. xiv)

There should be a clear functional separation of trading and back offic office e

functions relating to banks’ own investment accounts and PMS clients’  clients’  accounts. PMS clients’ clients’ accounts should be subjected by banks to a separate audit by external auditors. xv)

Acceptanc Acceptance e of funds by banks from their clients for managem management, ent, by whatever

scheme/name, other than deposits for specific periods which are subject to RBI’s interest rate directives, directives, should be subject to the RBI’s guidelines on PMS. In other words, apart from deposit taking, the banks should accept funds from their clients for management only under the terms and conditions stipulated for the PMS and not under any other scheme. 4..3.2.3

Portfolio Management Services (PMS) (PMS)-- Discretionary:

The discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client. Under discretionary PMS, independent charge is given by the client to the portfolio manager to manage the portfolio/funds. The discretionary Portfolio Management Service also includes portfolios broadly directed by the customer or those wherein the customer gives a negative list of investment products at the time of opening the account so that the Fund Manager ensures that such investment products are not included in the portfolio. Banks are prohibited prohibited from  from offering discretionary portfolio management services.

 

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4.3.2.4

Portfolio Management Services (PMS) by bank sponsored

subsidiaries Bank sponsored subsidiaries (domestic and overseas) may offer discretionary PMS, subject to the following conditions in addition to the conditions stated at 4.3.2.2. above for banks which will apply to their subsidiaries also : i)

The sp sponsor-bank onsor-bank should obtain specific prior approval of DBOD before offering

Portfolio Management Services through an existing subsidiary or for setting up a subsidiary for this purpose. This would also be applicable to a foreign bank, having presence in India as a branch and desirous of offering PMS through its subsidiary. (Setting up of any subsidiary will, as hitherto, be subject to the extant guidelines on para-banking activities of banks). ii)

All bank sp sponsored onsored subsidiaries offering Portfolio Management Services (PMS)

will be registered with SEBI and regulated as per SEBI (Portfolio Managers) Rules and Regulations, 1993 and shall adhere to all SEBI prescribed regulations including the code of conduct formulated thereunder. iii)

There shoul should d be an arms’ length relationship between the bank and   the

subsidiary. v)

The instructions/ guidelines on KYC/AML/ CFT applicable to the subsidiary,

issued by the concerned regulator, as amended from time to time, may be adhered to, in respect of customers to whom the service of PMS is being provided.

5. Timeline for re-organization Banks, including their subsidiaries, who are already undertaking the above activities, may reorganize their structure in accordance with the final guidelines within a period of one year from the date of issue of final Guidelines on the subject.

 

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APPENDIX List of Circulars consolidated in the draft guidelines on Wealth Management /Marketing /Distribution Services Offered by banks No 1.

Cir Circula cularr No No.. Mailbox clarification

Date March 25, 2006

2.

3. 4. 5. 6. 7. 8. 9.

10.

11.

12. 13. 14. 15.

Subject Marketing / Distribution of

Mutual Fund / Insurance etc. products by Banks DBOD.No.FSD.BC.60/24.01.001/2009- November Marketing/Distribution of 10 16, 2009 Mutual Fund Fund// Insuranc Insurance ee etc tc., ., Products Pro ducts by Ba Banks nks DBOD.No.FSC.BC.74/24.76.002/95-96 June 13, Marketing of Mutual Fund 1996 Units by banks DBOD.No.FSC.BC.129/24.76.002/97 October Retailing of Government 22, 1997 Securities DBOD.No.FSC.BC.129/24.76.002/97 June 8, Retailing of Government 1996 Securities DBOD .No. FSD. BC.67/24.0 1.001/2009- January 07, Disclosure in i n Balan Balance ce Sheet10 2010 Bancassurance Business DBOD.FSC.B DBOD.FSC.BC.27/24.01.018/ C.27/24.01.018/ 2003September Ent Entry ry of banks into 2004 22, 2003 Insurance business  business   DBOD.FSC.B DBOD.FSC.BC/16/24.01.018/ C/16/24.01.018/ 2000 August 9, Entry Ent ry of banks into 2001 2000 Insurance Insura nce busine business ss DBOD.No.FSC.BC.118/24.76.002/98 December Information System for 26, 1998 Portfolio Management Services (PMS) DBOD.No.BC.73/27.07.001/94-95  Acceptance of deposits dep osits June 7, 1994 under Portfolio Management Scheme (PMS) DBOD.No.BC.183/27.07.003/93-94 Information System for October 18, 1993 Portfolio Management Services (PMS) DBOD.No.BC.11/24.01.009/92-93 Portfolio Management on July 30, 1992 behalf of banks DBOD.No.FSC.BC.69/469-90/91 Portfolio Management on January 18, 1991 behalf of clients DBOD.No.BP.(FSC)BC.120/C.469-89 Portfolio Management on May 2, 1989 behalf of clients DBOD.No.Dir.BC.43/C.347-87  April 15, Portfolio Management on 1987 behalf of clients