Finance Ministry committee recommends SEBI to regulate bank distributors

The Sumit Bose committee has recommended that SEBI should directly regulate banks who sell mutual funds. Currently, while SEBI regulates all mutual fund distributors through AMFI it has no direct control on the sales practices of banks, as they are regulated by RBI.

“Each of the regulators should regulate the distributors for products which are under their mandate. For example, SEBI should regulate the banks directly for distribution of products regulated by it,” the committee has proposed.

“Banks and other institutions tend to over-sell (and as a result could often mis-sell) products belonging to their group companies,” points out the committee report.

Also, the committee has proposed that regulators should impose additional disclosure requirements on banks. It said that banks should be required to disclose products that originate from their group companies.

The RBI has explicitly said that the schemes bought by investors from banks should be at their own risk. “Banks should only act as an agent of the customers, forwarding the investors’ applications for purchase/sale of MF units to the mutual funds/Registrars/transfer agents. The purchase of units should be at the customers’ risk and without the bank guaranteeing any assured return,” states a RBI circular.

To protect the interest of customers, RBI has tightened its scrutiny on the third party distribution activities of banks. In its draft guidelines published in January 2013, RBI had proposed that banks should ensure that their employees do not receive cash/non-cash incentives directly from insurance companies, mutual funds and other third party product providers. Also, it had asked banks to have a board policy to avoid mis-selling and conflict of interest in marketing and distribution of own or third party financial products. Read the draft guidelines here.

However, RBI has not issued the final guidelines yet. 

In its report, the committee has said that banks have a high concentration of in-house sales to their AMCs.

Proportion of associate AMC commission received by banks

Read the full report here.

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