AMFI shelves proposal, will look at other options to curb churning.
At its general membership
meeting held on 9th March, AMFI had sent a communiqué to all fund
houses seeking the scrapping of upfront commissions offered by AMCs to
distributors. But smaller fund houses had opposed the move, arguing that they
would be hit hard if upfront fees were banned.
Now even some of the larger
fund houses have come out strongly against this proposal. According to the CEOs
of three big fund houses, AMFI has shelved this proposal. “Currently AMFI is
not taking any steps on this issue,” says the CEO of a mid-sized fund house.
“Around 90% of retail
investments have an average ticket size below Rs 5 lakh. To increase
penetration of mutual funds, almost all AMCs are ready to pay upfront
commission for investments up to a specific ticket size,” says a Vice President
(Marketing) of a domestic fund house.
After the ban on entry loads,
mutual fund distributors have been dependent on trail commissions. Apart from
this, fund houses also pay upfront commissions to distributors from their own
corpus for selling certain specific products. AMCs are concerned about churning,
not the quantum of commission that they pay.
“To control churning, we
have to think of different solutions. We do not think that banning of upfront
commissions will stop churning. It will open the doors for other malpractices,”
says the Country Head (Channel Sales) of a large fund house.
Most advisors are relieved. “It
is good news for us. After the ban on entry loads, many advisors have failed to
make clients pay for their service. These distributors earn their income through
upfront commissions. A ban would cause more distributor exits from the
industry,” says Sushil Sen, an IFA from Kolkata.
Another IFA told Cafemutual
that the regulator should not penalise the whole distribution community for the
malpractices of a few.
AMFI is trying to work out
other procedures to control churning. It will take up the matter with SEBI
after it puts these procedures in place.