In order to improve transparency, a nine-member Finance Ministry committee set up to recommend measures on curbing mis-selling has proposed to introduce a one-page disclosure form called ‘distributor-investor mutual fund disclosure form’. Distributors may have to disclose the percentage of trail commission in this form.
Earlier in November 2014, the Finance Ministry had constituted a nine-member committee headed by Sumit Bose, former Union Finance Secretary to review distribution incentives across financial products, rationalize commission structure and recommend measures to curb mis-selling.
In its recommendation report, the committee said, “At the point of sale, a one-page disclosure form that both the customer and the seller sign off on should be included. The disclosures should be in a manner that an average customer can understand what the product costs, what the benefits are and for how long should the customer hold the product.”
Apart from details of investor and distributor, the proposed form consists of four sections – AMC details, scheme details, investor profile and investment details and total expense charged to the investors.
While AMC details will have information on name, year of establishment and net worth of a fund house, scheme details section gives information on riskometer, past performance, CAGR and absolute return of the scheme and benchmark return.
Third section has a few questions on risk profiling to assess the risk appetite of investors like investment horizon, asset allocation and time horizon. In addition, this section has a question which asks investors to specify the reason for redeeming whether it is for churning portfolio or switching investments.
The last section of the form will include details of trail commission, time of investment, exit load and other expenses.
Meanwhile, the committee has recommended introducing revised benefit illustration form in insurance. This form should be given with the sale document of insurance policies. Insurance agents will have to explain to policyholders the benefits they stand to receive. “The seller/advisor should give in writing what the benefit illustration will be for the customer buying the product in a manner that takes into account all the recommendations on disclosure in the report. Both seller and buyer should sign this to ensure that a right sale has been made,” recommended the report.
Currently, benefit illustration form comprises only basic details like premium and sum assured.
Here are some key recommendations which the committee has proposed to add in benefit illustration form:
- Annualized net returns earned by policyholders where returns are calculated on investments,
- Annualized net returns in case of premature exit along with the surrender value;
- Loss of the guaranteed additions or bonus (based on whether it is a non-participating or participating plan) for all the years in case of premature exit.
