Dhruv Mehta made a cogent case on WF (Click Here) for a mature effort to address trust deficit which lies at the core of regulatory activism around the MF distribution business model. Leading IFAs including Amit Bivalkar (Click Here), Ramesh Maloo (Click Here) and Ashish Modani (Click Here)have all articulated on WF the ground realities and fallacies of the regulatory approach very eloquently.
Two associations reach out to the PM
Taking this a step further, some IFA associations have reached out to the Prime Minister, seeking his intervention in this matter. KAMFA has sent a letter to the PM, sensitizing him about the implications of the new SEBI circular.
Read KAMFA's letter to the PM: Click Here
Meanwhile, 125 IFAs from Varanasi - the PM's constituency, have filed a petition at his Varanasi office, seeking his intervention on frequent regulatory change that is destabilizing and jeopardizing the MF distribution business.
Read their petition: Page 1 Page 2
All attempts should be made to seek a level playing field and a stable regulatory environment. These are pre-requisites for orderly conduct of any business. I completely agree with Dhruv that we must seek the intervention of financial sector leaders who enjoy high credibility with the Government to engage with the regulator and / or the Government for this purpose. This kind of "Track II diplomacy" tends to work better when there is a "Track I" in process simultaneously - which includes petitions to the Government directly by those impacted.
Important to know whether you stand on firm ground or no
When making these efforts, it is however very important to know where you stand on firm ground and where perhaps you don't. It is equally important for the thrust of such petitions to have the same key messages - even if the language is different. I find a lot of focus in these petitions on commission disclosure and very little focus on unfair channel bias. In my humble opinion, distributor associations need to reverse this focus.
Be careful on commission disclosure concerns
There is a lot of concern being voiced that disclosing commissions is unfair and unwarranted, and will destabilize the business. Now, we need to be careful about what we say. There is a regulation in force since 2009 which requires all distributors, at the time of every transaction, to disclose the commissions that he will receive from this transaction and a comparative analysis for related products of other fund houses, which will enable investors to figure out whether the fund that is being recommended carries a significantly higher commission than others or not. There are annual self-certifications that distributors have been filing for several years which certify that they are complying with all regulations - including this. Now, if someone were to turn around and ask, "If the commission rate was routinely disclosed for every transaction and the investor anyway knows the amount he is investing, why is there so much concern now, when the rate will be multiplied by the amount and an absolute figure will be disclosed?"
A better way forward on commission disclosures
Making statements that commission disclosures will destabilize business and are unwarranted could tantamount to an admission that disclosures were not really made the way they are envisaged in the regulations. What you can and should however ask is something different - why another set of disclosure requirements when one set already exists? Distributor associations can consider filing an RTI enquiry to know the number of complaints SEBI has received in the last 3 financial years (year by year) specifically on non-disclosure of mutual fund commissions. This data can be sought by distribution channel (bank, ND, IFA) and by city as well. One would imagine this number in total will be negligible. If indeed this is the case, your petition to the Government should focus on asking SEBI to let the Government know why another circular on commission disclosures has been issued when there are negligible number of complaints by investors on non-adherence of this regulation.
The RTI enquiry can also seek information from SEBI (with the same channel and city split) of MF mis-selling complaints it has received in the last 3 years. This data should be analysed to see whether the number of mis-selling complaints are material in comparison to total MF transactions done in a year, and also to see whether complaints are concentrated for any one channel or region in the country.
If indeed the data proves what most of us believe (that there are hardly any complaints on non-disclosure of commissions and very negligible amount of complaints on mis-selling), your petition has a lot more data to support a question on why another round of commission disclosures are sought, when there exists a regulation on this matter with very little complaints on non-adherence.
Channel bias
Now, onto the other part of the circular, which I don't find too much noise about, but which I think distributors ought to raise an issue against. There is, in my view, a prima-facie case of channel preference being demonstrated by SEBI, which is unbecoming of a regulator. Why would you want a CAS statement for an investor who has only invested in regular plans, to show him the TER of direct plan equivalents - which he has not invested in? This information in no way is a statement of what he owns - it is additional information on what he doesn't own. This is a clear cut case (in my view) of a regulator nudging investors towards one product/channel in preference to another. The regulator has a right to abolish regular plans if they so desire. But you cannot have a situation where the regulator blesses both - regular plans and direct plans and then puts in huge effort to induce investors to choose one over another, including passing on information of products an investor does not own, in his account statement!
This issue of regulatory bias towards direct plans at the expense of regular plans also extends to the pricing formula that the regulator has come up with for direct plans. This issue has been flagged earlier on WF by Ashish Goel (Click Here). As the proportion of direct business and direct investors grows, the acquisition and servicing costs of direct clients ought to be captured separately and reflected in the pricing of direct plans. In the absence of this, regular plan investors are effectively subsidizing direct plan investors - which is clearly an anti-investor move and is strongly demonstrating regulatory bias for one set of products / one channel over others.
What is required in this case is for SEBI to give a mandate to any of the big accounting firms to come up with a proper costing template for direct and regular plans, which can then be adopted and implemented by AMFI across the industry. This template will seek to capture all selling, marketing and client servicing costs by channel and then arrive at unit cost by channel.
I believe there exists a strong case to seek a legal opinion on whether there is a prima facie case of channel preference being improperly exercised by the regulator - who is supposed to ensure a level playing field for all industry. If indeed legal opinion is supportive of this view, well you have a lot more to talk about in your petitions to the Government!
To conclude
I am not suggesting "taking on the regulator" - I do understand the reticence in doing so. But, I believe there is merit in seeking legal opinion - at least you should know whether you stand on firm ground or not. I have spoken to a few of the leading distributor associations about this - I do hope to hear from one or more of them soon on this legal opinion.
As I mentioned earlier, asking for a level playing field (regular vs direct plans) and for a stable regulatory regime is your right. It would help if all distributor associations focus on these two aspects. On commission disclosures, in my humble opinion, you should focus more on why one more regulation rather than the impact of disclosures.
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