In its report published yesterday to recommend measures for curbing mis-selling and rationalizing distribution incentives in financial products, the nine-member committee headed by Sumit Bose, former Union Finance Secretary has recommended that fund houses should not pay any upfront commission to distributors for selling mutual funds. Also, the committee has recommended doing away with the practice of ‘upfronting of commissions’.
Further, the committee has recommended that the commissions should only be paid on reducing AUM based trail. For instance, in case of lump sum investments, the trail will decline over the tenure of investment and become nil after a certain period of time, the committee has suggested.
Besides, the committee has said that B15 distributors should not get higher commission. It said that AMCs should on their own tap such unexplored markets to increase their market share. SEBI has allowed AMCs to charge a higher TER for sourcing applications from B15 cities. Currently, distributors from B15 cities are exempted from the current 1% cap on upfront commission imposed by AMFI.
The committee has also recommended that SEBI should lower the cost caps (within the TER) with the growth in AUM. “Competition has not reduced costs much below the expense ratio that was fixed
when the AUM of the industry was much lower,” states the report.
Besides, it has also recommended that fungibility within the TER should be done away with.
The committee has recommended measures in three areas – commissions, product structure and disclosures.
Recommendations related to product structure:
- Merge similar schemes to reduce confusion among investors
- Benchmarks should be made more relevant and schemes should be periodically tested to see if the asset allocation is conforming to the benchmarks
- Schemes should remain true to label
- Promote ETFs among retail investors
- Similar to insurance, introduce free look policy in mutual funds
Recommendations on disclosure:
- Penalize distributors pitching NFOs as cheap products on the basis of highlighting NAV “at par” value of Rs.10.
- Disclose past returns (along with benchmark returns) of schemes while selling products. Investors should be disclosed a range of past returns appropriate to the product tenure and should include returns of last 6 months and annualized returns since inception and 2 year returns thereafter
- Disclose trail commission to investors at the time of sale
- In addition to the disclosure of scheme performance subject to market risk, put additional disclosure stating that the fund’s performance is subject to fund house/manager’s competence
- Inform all investors when fund manager of a scheme changes
- The AUM rankings published by AMCs on their websites, information memorandum etc. are presently combined for all products which give a misleading picture. For retail products, the AUM rankings should be shown only for the retail AUM.
Submit your feedback to alka.taneja@nic.in by October 05.
