IFSCA

Code of Conduct for Registered or Associated Distributors under IFSCA

The IFSCA is a regulatory body that manages the financial products & services in IFSC. The authority with the purpose of developing and regulating the financial products & services and the intermediaries has mandated that the distribution of capital market products & services shall take place in accordance with the IFSCA (Capital Market Intermediaries) Regulations 2021. Moreover, as the unified regulator for the global financial centre, the authority has allowed the registered or associated distributor to undertake the global distribution from IFSC and offer their services to different clients worldwide. Through this, the authority will keep a check on the transaction and will be able to protect the interests of the clients. Further, the authority has also made it mandatory that the registered or associated distributor must abide by the code of conduct as notified by the IFSCA for the distribution of capital market products & Services dated 21^st December 2022. The present blog will discuss the code of conduct and the relevant conditions mentioned under the circular on the distribution of capital market products and services.

Relevant Provision under Circular

As per the regulatory framework on the distribution of capital market products & services, every registered or associated distributor and their employee shall have to abide by the code of conduct as per Schedule III of the IFSCA (Capital Market Intermediaries) Regulations 2021 and relevant conditions enumerated under the circular. It is further allowed that the registered distributor can engage or tie up or collaborate or enter into an agreement with the associate distributor for undertaking permissible activities. However, the registered distributor must ensure that:

• It conducts an assessment for every entity it wishes to enter into an agreement with as an associated distributor to ensure compliance with the code of conduct.
• It ensures compliance of the associated distributor with the code of conduct with respect to only the permissible activities which are undertaken as part of the arrangement.

Code of Conduct

The circular made it mandatory for all the registered distributors or associated distributors they comply with the following code of conduct. The circular has divided the code of conduct into two parts: the General and Advertisement code of conduct.

General Code of Conduct

The general code of conduct is as follows:

Integrity & Fairness: The distributors must maintain high standards of integrity and fairness while conducting all business transactions.

Due care, skill & Diligence: The distributors must act with due care, skill and diligence while conducting their business and consider the client’s interests as paramount.

Avoid any malpractices: The distributors must avoid any malpractices, including mis-selling of capital market products and services. They shall consider the interests of the client and their suitability to the financial needs.

Due diligence of Products & Services: The distributors must undertake due diligence on the capital market products & services that are being distributed to the investor other than sophisticated investors and also assess the suitability of products or services offered to the investors. For undertaking due diligence, the distributors may ask for information from the customers about their financial status, investment objectives, investment experience etc., so that they can be in a better position to offer them capital market products & services according to their risk profile.

Act in best interests: The distributors must act in the client’s best interest and the market’s integrity. Further, they shall inform the clients if the capital market products & services are not suitable for them.

Acquaintance with agreements and other documents: The distributors must be acquainted with the terms of the disclosure agreement, private placement memorandum and all other relevant agreements or documents.

Written Agreement: The distributors must enter into a written agreement with the clients, issuers, service providers and associated distributors, which will lay down the mutual rights, relationship, liabilities and obligations and other material details.

Declaration from a sophisticated investor: The distributor must obtain a declaration from the sophisticated investor that it understands the risk associated with the capital market products & services.

Disclosure of material information to the client: The distributors must disclose all the material information to their prospective clients, including information relating to business, disciplinary history, terms & conditions of distribution services, affiliations with any other intermediaries, conflict of interests and any other information.

Urging clients to go through all documents: The distributors must urge their clients to go through the disclosure documents, private placement memorandum, and other capital market products & services related documents, agreements they entered with the client and regulated financial entities before making a financial decision.

Disclosure of information in relation to capital market products & services: The distributor must disclose all material information in relation to the capital market products & services offered to the clients, including self-positions and related party transactions.

Disclosure of direct & Indirect Remuneration: The distributors must disclose the amount of direct and indirect remuneration and the basis for such remuneration it services for rendering distribution services. They shall also disclose the relationship that may that is between the distributor and the entity offering the capital market products & services.

Assistance with KYC procedures: The distributors must assist the client in completing the KYC and related procedures.

Assistance with AML or CFT policies: The distributors must assist the client in compliance with the relevant laws relating to AML or CFT.

Avoid tampering with the application form: The distributor should not tamper with the application form and other documents submitted by the client, including inserting, deleting or changing any information in the client’s application form or any other documents provided by the client.

Disclosure of full and latest information: The distributors must disclose full and latest information about the capital market products and services offered by the regulated financial entities and should clearly highlight the assumptions made in performance calculations, performance projections and risk assessments etc.

Avoid any representations to assurance: The distributor must avoid giving representation in regard to assurance or misrepresentations to their clients in respect of risk characteristics or returns of capital market products & services.

Avoid any offerings: The distributor must avoid any act of attracting clients through a kickback, rebate offers, gifts etc.

Development of appropriate infrastructure: The distributor must maintain the necessary infrastructure to provide support to their clients and regulated financial entities so as to discharge their responsibilities in accordance with the mutually agreed terms.

Distinction between proprietary investments and distribution activities: The distributors must make a clear distinction in regard to their proprietary investments and those carried out in response to distribution activities.

Compliance with applicable laws in the case of Omnibus structure: The distributors must ensure compliance with all the applicable laws if they are allowed to facilitate the client’s investment through the omnibus structure.

Maintenance of records: The distributors must maintain adequate records in respect of the clients in physical or digital form, including correspondence with the clients on the particular capital market product or service suitability and consent or dissent of the clients.

Statutory Communication is reliable: Distributor must ensure that all client-related statutory communications and mutually agreed reports are reliable and timely sent to their clients.

Step to avoid conflict of interest: The distributors must take all steps to avoid any conflict of interest and develop appropriate policies and procedures to identify, monitor, manage and disclose those conflicts of interest in order to prevent them from adversely affecting the interests of the clients.

Segregation of activities: Distributors must ensure the segregation of activities in order to avoid any conflict of interest that may arise due to multiple activities and further ensures proper disclosures about the segregation to the clients.

Confidentiality of client’s detail: Distributors must protect the confidentiality of the client’s details, transactions, deals, and investment goals which they become aware of during the course of a business relationship.

Complaints redressal mechanism: The distributors must possess a robust complaints redressal mechanism and escalation matrix. They shall resolve all the complaints and grievances arising from their distribution activities in a timely manner.

Avoid over-transacting activity: Distributors must avoid encouraging over-transacting and churning clients’ portfolios to earn higher remuneration.

Interests of the client are paramount: The distributor must ensure that the client’s interests are paramount while distributing capital market products & services and that earning extra remuneration should not form the basis for distributing any product & services to the client.

Not indulge in fraudulent and other related activity: Distributor must not indulge in any fraudulent, deceptive or manipulative practices.

Holds valid Registration from IFSCA: Distributor must have a valid registration which shall be obtained from the IFSCA at all times and comply with all the applicable laws, code of conduct and norms related to qualifications and experiences of their principal officer and other employees.

Advertisement Code of Conduct

The advertisement code of conduct are as follows:

• The advertisement shall be accurate, fair, true, clear, complete, concise and unambiguous.
• The advertisements shall not contain any statements that are misleading, false, biased or deceptive, based on assumptions or projections.
• The advertisements shall not contain any testimonials or any rankings that are based on any criteria.
• Advertisements shall not be designed in such a way that they may disguise the significance of any statement.
• The advertisement shall not contain any statement that may, directly or by omission or by implication may, mislead the client.
• The advertisement shall not contain any slogan that is unwarranted or exaggerated, inconsistent or unrelated to the nature and risk & return profile of the capital market products & services.
• The advertisement shall not be framed in such a way that it may exploit the clients’ lack of experience or knowledge. Further, the advertisement shall refrain from using any technical or legal terminology, complex language, or excessive details that may detract the clients.
• The advertisement should contain timely information consistent with the disclosures made in the private placement memorandum, disclosure document or any other document created by the issuer or service provider. It shall further explain the characteristics of the capital market products or services.

Conclusion

IFSCA^[1], with the aim to regulate the distribution business of the registered or associated distributors, has mandated that they shall abide by the code of conduct during their course of business. The code of conduct acts as a compliance measure that will ensure that their business is conducted promptly and reasonably. It will help streamline the processes across all the registered or associated distributors and help the investors to understand the capital market products & services. The distributors are further required to abide by the advertisement code of conduct along with the general code of conduct.

Read Our Article: An Exhaustive Analysis of Insurance Brokers Code of Conduct