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Sebi plans new rules on MF sales

Sebi plans new rules on MF sales
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First Published: Thu, Mar 24 2011. 12 20 AM IST
Updated: Thu, Mar 24 2011. 12 20 AM IST
Mumbai: India’s capital market regulator is planning to introduce a new set of regulations to curb mis-selling of mutual fund (MF) schemes by distributors of the Rs 6.75 trillion industry.
Taking the first step towards forming these regulations, the Securities and Exchange Board of India (Sebi) sent a note to all asset management companies (AMCs) last month, asking them to ensure that their distributors follow certain due diligence while selling MF schemes.
This was followed by a meeting with large fund houses last week, two persons with direct knowledge of the development said.
A Sebi official declined comment.
“The distributors are not registered with Sebi and, hence, they cannot be regulated directly. Sebi sent a note to the asset management companies in February and asked them to adhere to certain norms while selling schemes,” said one of the two persons. He declined to be identified citing the sensitivity of the matter.
There are 44 registered AMCs and close to 100,000 distributors. MF schemes are sold by individual distributors, brokers and through bank branches.
Under the existing framework, an entity is entitled to distribute MF schemes after securing a certification from the Association of Mutual Funds in India, a representative body of the industry.
The distributors work as per the directions of their respective AMCs, and are paid commissions accordingly.
The distributors often sell MF schemes promising high returns showing past records and exaggerating the performance of the stocks or sectors where the schemes intend to allocate the money. Many a time, they also do not properly assess the risk appetite of the customers.
In the absence of any regulations on sale of funds, if a scheme is mis-sold, an aggrieved customer cannot hold the distributor responsible. The risk is even higher for the customers in smaller cities as they do not have a clear idea about the nature of mis-selling and the required authority who could resolve their complaints.
“Sebi has discussed the matter with the AMCs a week back. The aim is to bring in new regulations to control mis-selling. Customers who buy mutual funds schemes from bank branches too often become victims of mis-selling. The distributors who chase these customers are not regulated at present,” said the second person.
Customers cannot hold their distributor responsible for violating any specific norm as there are no regulations in place. They do file complaints with the AMC or even Sebi at times, but since there is no regulation, even the authorities find it difficult to penalize the errant distributors and resolve customer complaints.
“New regulations will take care of mis-selling and enhance transparency in the fund industry,” the second person added.
Sebi’s move is somewhat similar to what the Insurance Regulatory and Development Authority (Irda) did last year. In order to check rampant mis-selling in the insurance industry, Irda has tweaked the rules to minimize upfront commissions paid to insurance agents and proposed to put in place “needs analysis” guidelines.
Under this, all agents are required to keep a record of their conversations with prospective clients and justify sale of policies based on the customer’s profile, needs and financial capabilities.
The insurance regulator has also strengthened its grievance redressal mechanism and launched a dedicated call centre to handle policyholders’ complaints. The insurance industry has been facing thousands of complaints on mis-selling, especially on unit-linked insurance plans—a hybrid product that combines insurance and investment.
There are specific regulations for insurance agents and sales of insurance policies, and if any agent is found violating these, the customers can seek a resolution either through the insurance ombudsman or filing a complaint with Irda.
In order to ensure that an MF scheme is not mis-sold, in August 2009, Sebi had restrained MFs from charging upfront commissions, or entry load from the investors. Currently, a distributor can ask his client to pay commission, based on advice and services, but this incentive is not fixed.
Indeed the AMCs pay their agents a commission, but the amount is much lower than what these agents used to earn before entry load was banned. In the absence of hefty upfront commissions, the distributors often focus on sales volumes, exposing the customers to a higher risk of mis-selling.
The MF industry does not have any ombudsman to deal with mis-selling and customer grievances, and the only option before a customer is to take legal action against the distributor. Sebi is planning to tackle the issue through a customer-profiling approach, similar to what Irda has done. The chief executive officer of a foreign asset manager said the note on distributors was received from Sebi in February after U.K. Sinha, the new Sebi chairman, took charge.
“It basically says the AMC has to categorize distributors as institutional, advisory and so on. It also requires the AMCs to ensure that the distributors do a profiling of their customers and sell products accordingly,” he added.
In the past, Sebi had raised concerns over resolution of customers’ complaints in the MF industry. Sebi executive director K.N. Vaidyanathan in a recent seminar said efficient redressal of grievances is a key component of protection of investor interest. In another conference on capital markets last year, Vaidyanathan had indicated that Sebi is trying to regulate distributors. “The industry is going through an evolutionary phase and mis-selling has to be curbed,” he said.
anirudh.l@livemint.com
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First Published: Thu, Mar 24 2011. 12 20 AM IST