HDFC Chairman, Deepak Parekh urged SEBI to discourage AMCs to reward distributors with junkets.He was speaking at the second AMFI Mutual Fund Summit held today in Mumbai.
Expressing his concern over unusually high commission payouts to distributors, Parekh said that going forward commission of distributors will be the key issue in shaping the industry. “While TER is capped, there are some concerns on how distributors are being incentivized. Of course, we cannot undermine the role of distributors in growth and development of the industry. I sometimes wonder, how 5000 distributors service 80 million customers. Unfortunately, some distributors are being lured by higher commission and incentives.”
Parekh further said that such a practice leads to mis-selling of mutual funds. “When a distributor begins to play a game of hopping and shopping, the outcome is great deal of mis-selling. Such practices eventually hurt retail investors.”
Talking about the root cause of this issue, he said, “In my view, the problem is intense competition in the industry. While a few AMCs deviate from the norms, it creates pressure for other AMCs to follow suit in order to retain their business. Clearly, one doesn’t want to encourage a practice where distributors demand freebies and exotic holidays. And if the demand is not fulfilled, they take the business elsewhere. I am personally against the practice of rewarding distributors with foreign and domestic holidays in the name of training program. In many countries, this practice is illegal.”
Parekh urged SEBI to stop such practices. He said, “First of all, is your customer really aware of these incentives while buying your product. Will they buy your product, if they come to know about these practices? I think transparency and disclosure is the only way forward. I hope regulator should stop these practices which has become very common. This problem isn’t unique in just mutual funds, it is even more common in insurance and other financial products.”
He further said, “When there is a consensus of self-discipline and adherence to the code of conduct, the regulator has to step in to clamp down on undesirable practices. At this point in time, most retail investors need handholding of distributors and they are unwilling to pay additional charge for advisory fees. The challenge is how we inculcate a culture where distributors recommend a fund based on its merit and not based on the product commission.”
