Industry welcomes SEBI move to treat mis-selling as ‘fraud’; may prove tough to enforce

It won’t be easy to prove a case of mis-selling unless transactions are recorded on paper.

SEBI in an attempt to curb mis-selling is planning to include the term ‘mis-selling’ in its 'fraudulent and unfair trade practice' in SEBI Regulations.

According to SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 - “fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include—

1. Knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;
2.  A suggestion as to a fact which is not true by one who does not believe it to be true;
3. An active concealment of a fact by a person having knowledge or belief of the fact;
4. A promise made without any intention of performing it;
5. A representation made in a reckless and careless manner whether it be true or false;
6. Any such act or omission as any other law specifically declares to be fraudulent,
7. Deceptive behaviour by a person depriving another of informed consent or full participation,
8. A false statement made without reasonable ground for believing it to be true

While SEBI’s intentions are good, officials believe that it would be very difficult to define and prove a case of mis-selling.

Fund officials are of the view that even if ARN is cancelled nothing stops distributors from acquiring a new AMFI registration number (ARN) through a family member. Sometimes, ARNs suspended by AMFI are revoked after a certain time period. It is also very difficult for any AMC to stop working with a large distributor if it is found guilty of any mis-selling. “It’s a good move but it will be difficult to monitor,” says a retail channel head of a large fund house.

The industry would have a tough time to enforce the regulations. “The definition of mis-selling itself is not clearly defined. A 60 year old would still want to invest in equity. Distributors could only be booked if they are proved guilty. Investors do sometimes complain if they lose money in a scheme,” says an operations head of a leading fund house.

While the exact repercussions of calling mis-selling as ‘fraud’ will be spelt out soon by SEBI, industry believes that it is a step in the right direction and will help deter mis-selling. Fund officials say that SEBI’s move is in line with the practices followed internationally. “It is very important and will strengthen the processes of the industry. This is how distributors are regulated internationally. There could be a penalty in addition to ARN suspension to make sure that investors get the right advice,” says a sales head of a domestic fund house.

In 2002, AMFI’s best practices in sales and marketing had drafted AMFI guidelines and norms for intermediaries (AGNI) under the then chairmanship of A P Kurian. The report outlines the code of conduct which distributors need to adhere to. As per the current practice, investors could either complain to AMC or AMFI. As per AGNI, AMFI is required to seek an explanation for the concerned violation from the intermediary within three weeks. If it finds the intermediary’s response unsatisfactory, it issues a warning of cancellation of AMFI registration at the first instance. If the intermediary is found violating for second time, AMFI cancels or suspends their license. The distributor has a right to appeal to AMFI. AMCs stop paying commission to distributors whose license has been suspended by AMFI. 

Fund officials say that there has to be certain time frame within which investors have to make complaints after receiving an account statement. “You can’t come after five years and say that I have been mis-sold a product. It could also happen that investors could mis-use the regulation to lodge complaints on frivolous matters. It will be difficult for us to identify or prove a case of mis-selling. Investors normally complain if they can’t redeem their money when the investment has a lock-in. Investors can’t take action against every transaction. Then people will lose faith on distributors. One can’t book a distributor based on oral statements,” says the sales head quoted above.