Large mutual fund distributors are now being paid the commissions that were held back after they started sharing customer information with mutual funds, says Ravi Samalad. Read to know more.
Mumbai: Channel distributors have begun to share their investor-client’s necessary documents with mutual fund houses after commissions due to them on fund units sold were held back.
Financial services companies and banks with large nation-wide networks are referred to as channel distributors. ICICI Direct and Citibank are among channel distributors actively selling mutual fund schemes.
The Securities and Exchange Board of India (SEBI) had in December 2009 asked the trustees of fund houses to stop paying commissions to channel distributors who fail to deposit all the documents required from investors for fulfilling the know-your-customer requirements.
Industry sources estimated the amount of commissions that were held back by fund houses to be around Rs 100 crore.
SEBI had not received information from trustees at mutual funds on the availability of investor documents within a specified time. The regulator has since given fund houses time till November 15, 2010 to comply with the KYC norms for existing investment accounts.
For opening new accounts, the regulator has said that all documents must be available with the asset management companies (AMCs) and not merely with distributors. The trustees are required to submit a confirmation report to SEBI by November 22, 2010.
‘It appears that all the investor related documentation is not available with the AMCs. It has been observed that due to such incomplete documentation, investors’ right to approach the AMCs directly are restricted and investors are forced to depend on the distributors for executing any financial or non-financial transactions’ states the SEBI circular dated 12 August 2010.
According to industry players, majority of the accounts where KYC documentation was not available belonged to channel distributors. These channel distributors were reluctant to share documents that proved their clients’ identity and place of residence with the registrar and transfer agents (RTAs). RTAs act as back office record keepers for mutual fund houses.
“That was the business model which functioned from day one when these channels came into existence. So now the business model is undergoing a change. They were giving declarations that the documents were available with them and any auditor can come and review them,” said the CEO of a mid-sized mutual fund, requesting anonymity.
Distributors have now started to furnish these documents to AMCs. The industry body AMFI, in a recent circular, has asked fund houses to release payments of commission on a case by case basis. Media reports say that AMFI is also considering conducting an audit through independent auditors at RTAs like CAMS and Karvy to check the status on KYC compliance by all investors in mutual funds.
“The reason for not sharing is due to the cumbersome nature of data required. The process is too lengthy and that calls for manpower deployment. We have completed the process though,” said K. Venkitesh, National Head, Distribution, Geojit Financial Services Ltd.
According to industry sources, some distributors abandoned their commission due to the huge task of collating old documents.
AMFI is also worried about the flow of suspicious funds into mutual fund schemes. It has, therefore, tightened the KYC norms for mutual fund investments received through channel partners. Earlier, only investments up to Rs 50,000 and above required investors to undergo KYC compliance. From 1st January 2010, AMFI has said, all investments will require KYC documentation. Investors like non-resident Indians / persons of Indian origin (PIOs)/ Overseas Citizens of India (OCIs), channel investors, corporates, partnership firms, trusts and Hindu undivided families (HUF) investing via channel distributors will have to comply with this norm. An AMFI committee has recommended introduction of KYC compliance for investments up to Rs 50,000 through all distribution channels in a phased manner. SEBI is considering the AMFI proposal. Investments up to Rs 50,000 are currently not required to be supported by KYC documentation.
