SEBI rejigs supervision model; stricter checks on high-risk cos

PTI New Delhi | Updated on November 27, 2014 Published on November 27, 2014

To help it better regulate the marketplace and strengthen its surveillance system, regulator SEBI has decided to adopt a supervision model based on risk levels for various market entities including brokers and mutual funds.

Under the new model, various market entities would be divided into four groups — very low risk, low risk, medium risk and high risk — and the quantum of surveillance and number of inspections would increase as per the risk level.

This new supervision regime has been put in place as per recommendations of an independent global consultant and the subsequent suggestions made by an internal Task Force at SEBI, while taking into account practices followed by many overseas regulators, a senior official said.

The move would help the existing surveillance system take care of most of the smaller offences, so that the investigation resources are utilised more effectively to tackle serious violations in the market place.

The new model would follow four distinct steps — assessing the risk posed by a market entity, assigning ‘risk and impact rating’ to it, determine the supervisory risk rating score and then adopt a suitable supervisory approach.

The overall risk profile of an entity would be computed as a function of two components — business or activity specific risk and the impact risk arising out of default or failure.

The supervisory approach based on risk levels is being implemented in a phased manner, the official said, while adding that the first step towards its implementation has been achieved with finalisation of a report in this regard that provides necessary guidance to the supervisory divisions to formulate policies for supervision and inspections in future.

Earlier in September, Chairman U K Sinha had told PTI that SEBI was working on this risk-based supervision model while becoming the first financial sector regulator in the country to have done a study of its own regulatory impact.

The SEBI chief had further said that specific metrics would be put in place to determine the risk that every firm poses to the system and based on which enforcement actions can also be initiated.

While the existing supervision model followed by SEBI has been very effective, it was found that the approach was ’loosely risk based’, where no formal risk ratings were assigned to regulated intermediaries and the current resource allocation approach did not allow for an assessment of risk concentration across all regulated intermediaries.

The new supervisory approach is based upon overall risk assessment of the intermediary rather than on individual factors such as turnover, complaints, penalties, etc.

“The total number of inspections per intermediary will increase and the new approach would involve a combination of comprehensive, thematic and off-site monitoring for inclusive supervision of the intermediaries,” the official said.

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Published on November 27, 2014
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