If you are using your bank to buy funds, don't sign the 'execution-only' declaration.
OK. So there is one more acronym to remember and deal with. Jostling for space with PAN, KYC and UID is a newly born creature. Meet the little fledgling—it’s called the EUIN or the Employee Unique Identification Number. When it grows up, it will cover the three million sellers of financial products in India. To see why it was born, we’ll have to go back to the 13 September, 2012, circular of the capital market regulator (http://bit.ly/11TWCtu) that laid out the road map of change for mutual fund (MF) manufacturers and sellers. Titled ‘Steps to Re-energise the Mutual Fund Industry’, the circular used carrot and stick to get the industry to do more than chase after the wholesale part of the market. Buried in the section that dealt with the distribution of MFs was a direction to the industry association, the Association of Mutual Funds in India (Amfi), that it should “create a unique identity number of the employee/ relationship manager/ sales person of the distributor interacting with the investor for the sale of MF products, in addition to the Amfi Registration Number (ARN) of the distributor." And that the MF application form should have a box for the EUIN.
Ideally a job for the forthcoming self-regulatory organization (SRO), Amfi has kicked off the process and has directed fund houses to stop paying commissions to distributors that are not EUIN compliant from the beginning of this month (June 2013). With about 50,000 EUINs issued, it is clear that chunks of the market are not taking this seriously. And the reason is to be found in the regulatory arbitrage that sellers take advantage of with such impunity.
Industry insiders understand who this was aimed at. Protected firmly by their regulator, the Reserve Bank of India (RBI), who takes the view that third-party products need to be regulated by the respective regulators and not by the RBI, bank branches have seen the sale of MFs, insurance products and other structured products using dodgy sales practices that sometimes border on fraud. The unwritten protocol between Indian financial sector regulators and the pre-eminence that RBI believes it has as the oldest regulator, makes most intra-regulatory meets farcical, where the real elephants in the room are grimly ignored. One-third of all MF sales happen through banks and as the owner of high net worth clients, the bank is an entity that funds and their regulator find difficult to deal with. That banks churn their MF portfolios is well known. That banks offer unsuitable products to investors too is well known. And anybody who has bought an MF scheme or insurance product from a bank and has returned to complain has heard this strange response from the bank: the person who sold this to you no longer works here, there is nothing the bank can do. The bank distances itself from its own employee. In the absence of a proactive regulator, banks remain the wild west of distribution.
We must look at the EUIN as a game changer given the current status quo where both the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) are unable to check the blatant mis-selling that banks do. We can call it a cop-out—go after the individual rather than the bank—but that’s what this is and it is better than not moving on the road to regulating the sellers of financial products in entities not regulated by Sebi and Irda. The EUIN is an alphanumeric code assigned to each customer facing individual. This number will stay with him as he moves from job to job across his career. The idea is to finally map sales behaviour to a person and then use regulatory powers to deal with breaches in conduct. But there is a major anomaly in the EUIN roll out—there is an ‘execution-only’ declaration that the investor can sign if she has seen the EUIN box empty on the form or website through which she buys her funds. By signing this declaration, the investor is agreeing that she has not been advised and has only used the bank or agent as an execution channel. I hear that banks have already sent a mandate down the branches to get all customers to sign this declaration. If you are using your bank to buy funds, don’t sign this. Insist on the EUIN number. And Amfi should remove this option if it sees that banks are not complying with the spirit of the regulation.
The EUIN is a baby step right now. Much more needs to be done in terms of using it properly. The road ahead should look at collecting the sales record of each EUIN entity. Regulatory strictures, consumer complaints, remuneration and bonus earned on sales would be the first set of data to be collected. The EUIN should then become accessible to retail investors who can do an online check to see the past record of the person who sells them a financial product. Precedents exist in other parts of the world with an electronic registry giving both regulators and investors a handle on the most difficult entity to regulate—the final seller of a financial product. The insurance regulator should use the same EUIN to track insurance sales. And then finally switch over to using the UID number instead of the EUIN as everybody gets UID-ed in India.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at email@example.com