The deadline for mutual fund (MF) distributors and agents to get compliant with the know-your-distributor (KYD) norms expired on 31 March. While official figures say that almost 95% of active agents have already done their KYD, industry estimates suggest that only about half of the total distribution force would have completed KYD by now. Agents who haven’t yet complied with the norms are in a rush to get KYD-compliant.

“About 40,000 agents have completed their KYD process. These constitute a significant chunk of active agents who hold an Amfi registration number (ARN)," says V. Ramesh, deputy chief executive, Association of Mutual Funds of India (Amfi), MF industry’s trade body. However, estimates given to us by Amfi and distributors suggest that there are up to 100,000 ARN holders in the MF industry. “Those who do not have their KYD by now would mostly be inactive distributors," adds Ramesh.

Agrees Srinivas Jain, chief marketing officer, SBI Funds Management. “We are pushing all our agents to get KYD-compliant. The ones who still haven’t done their KYD may not be serious distributors in any case," he says.

Originally, Amfi had set a deadline of 28 February for agents to get KYD-compliant, failing which MFs were asked to stop paying commissions. Eventually, Amfi extended the deadline by a month, till 31 March. In its board meeting held on 18 March—and via a note that it thereafter issued to all mutual fund houses on 23 March—it said that about “50-60% of the distributors empanelled with the AMCs have complied with the KYD requirements. The Amfi board has, therefore, decided that there will be no further extension of the deadline…"

However, not all agents are impressed as a section of them who are still not KYD-compliant will stop getting commissions. Says Manish Gadhvi, head (Mumbai operations), NJ India Invest Pvt. Ltd: “In an era where distribution commission has dropped and many agents are already finding it difficult to meet a living out of selling MFs, a large non-compliance is not good news."

What is KYD

While so far the heat was on the investor to get compliant with the know-your-client (KYC) norms—which tags your key details and information such as permanent account number (PAN), bank account and address proof so that the investments can be traced back to its rightful owner—Amfi now wants to map the distributors as well.

When Amfi had initiated the KYD process last year, Hoshang Sinor, Amfi’s chief executive officer, had said that a few distributors had carried out certain fraudulent transactions, including giving third-party cheques. These distributors vanished and there was no way to track them down despite a police complaint being filed against them.

For MF investments, third-party cheques are of bank accounts that do not belong to you. In a separate but related move, Amfi had also advised fund houses to not accept third-party cheques, effective 15 November 2010. “There was a case last year when a distributor had fraudulently changed his investor’s bank mandate with a particular mutual fund, and withdrew about 1 crore worth of investments. Though he was caught later, KYD process will only make it easier for fund houses and the authorities to track down fraudulent distributors," says a Mumbai-based distributor, who did not want to be named.

Hence KYD is the first step in keeping track of distributors by capturing his or her key details. All ARN holders are required to submit their PAN card and an address proof at any of the offices of Computer Age Management Services Ltd (CAMS), an MF registrar and transfer agent and also the central agency appointed by Amfi to carry out the KYD process.

In addition to the documents, MF agents are also supposed to get fingerprinted. While individual agents will need to get fingerprinted, institutional agents such as national distributors, banks and financial planning firms will need to get all their authorized signatories fingerprinted. For instance, though Bajaj Capital Ltd, a national distributor, is present at 70 locations across India, only one of its employees (the official signatory attached to the firm’s ARN) had to get himself fingerprinted.

“The move is the beginning of an exercise to bring even mutual fund advisers under the regulatory ambit of the Securities and Exchange Board of India (Sebi), which will prove very beneficial for the industry. It will provide a clear picture of the kind of people who operate as mutual fund advisers in the country which will help the regulator in devising suitable guidelines so as to become eligible as a mutual fund adviser," says Anil Chopra, group chief executive officer, Bajaj Capital.

Will KYD help?

Mapping MF agents via their fingerprints and key documents appears to be a first step in regulating distributors. The final aim is to regulate the distributors who sell financial products. Last month, Sebi circulated a note to all fund houses, asking them to ensure that their institutional distributors, such as banks, to follow certain due diligence while selling MF schemes.

Ashu Suyash, chief executive officer, FIL Fund Management Pvt. Ltd, says that since distributor regulations in India are still not in place, the KYD process bodes well for everyone. “Ultimately, the investor’s money should be in safe hands and if the agents are well-mapped, it gets tough for a fraud to go unnoticed."

What should you do

Check whether your agent has done his KYD already. Upon completion of his KYD process, your agent gets an acknowledgement from CAMS; demand to see this acknowledgement the next time your agent comes to you.

“If mutual funds have the right to know details about their customers, including his whereabouts, earnings, savings and investment, investors also ought to have such details of their distributors. It will help in reducing mis-selling and chances of fraud will also reduce," said Vijay Aggarwal, vice-president and head (private wealth management), Unicon Financial Intermediaries Pvt. Ltd. But with most active MF agents already KYD-compliant by now, that shouldn’t be a problem.