SEBI has issued a consultation paper in which its working group on PMS has proposed that the PMS industry should ban upfront commission and move to all trail model to compensate their distributors to reduce mis-selling.
SEBI said, “Generally, it has been observed that 100% of the upfront fees / set up fees charged to the Client are paid as commission to the Distributor. With a view to curtail mis-selling and to prevent distributors pushing up- fronted products, the working group has recommended that distributor commission shall be only on trail basis. Trail-based income shall also ensure that the portfolio manager does not strain business calls, which will hamper his longevity.”
Among other key recommendations of the working group are
Distributor related proposals
- Distributors selling PMS will have to mandatorily disclose their commission
- SEBI to set a common minimum qualification criterion for PMS distributors
- For now, portfolio managers can utilize services of mutual fund distributors. This will be valid till a separate certification examination announced for the PMS distributors
- Distributors should clearly disclose their services i.e. if they offer “advisory” or “execution only” services
- Distributors cannot indicate or assure returns
- The onus of ensuring that the distributors follow the ‘Code of Conduct’ shall lie with the portfolio managers
Industry related proposals
- Operating expenses excluding brokerage will be capped at 0.50% per annum along with custody charges of 10bps or actual whichever is lower and audit fee/notary charges/ miscellaneous of 25 bps or actual whichever is lower
- Broking charges can be charged to clients account as expense at actuals
- Maximum exit load of 3% on redemption within a year, 2% on redemption within 2 years and 1% on redemption within 3 years. There will be no exit load after 3 years
- Minimum threshold limit to invest in PMS to be increased from Rs.25 lakh to Rs.50 lakh
- Ease of on boarding clients: Custody should allow digital signature for account opening
- Performance fee should be charged on ‘without catch up’ basis i.e. performance fee to be charged only the amount over and above a hurdle rate
SEBI has invited feedback of all stakeholders by August 30, 2019. You can send your comments at pmsreview@sebi.gov.in via email.
